Apple 1998 Annual Report Download - page 55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
A reconciliation of the provision (benefit) for income taxes, with the amount computed by applying the statutory federal income tax rate (35%
in 1998, 1997, and 1996) to income (loss) before provision (benefit) for income taxes, is as follows (in millions):
The Internal Revenue Service (IRS) has proposed federal income tax deficiencies for the years 1984 through 1991, and the Company has made
certain prepayments thereon. The Company contested the proposed deficiencies by filing petitions with the United States Tax Court, and most
of the issues in dispute have now been resolved. On June 30, 1997, the IRS proposed income tax adjustments for the years 1992 through 1994.
Although a substantial number of issues for these years have been resolved, certain issues still remain in dispute and are being contested by the
Company. Management believes that adequate provision has been made for any adjustments that may result from tax examinations.
NOTE 6--SHAREHOLDERS' EQUITY
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' non-voting convertible preferred stock ("preferred stock") for $150 million.
Except under limited circumstances, the shares of preferred stock may not be sold by Microsoft prior to August 5, 2000. Upon any sale of the
preferred stock by Microsoft, the shares will automatically be converted into shares of Apple common stock at a conversion price of $16.50 per
share and the shares can be converted at Microsoft's option at such price after August 5, 2000. Each share of preferred stock is entitled to
receive, if and when declared by the Company's Board of Directors, a dividend of $30.00 per share per annum, payable in preference to any
dividend on the Company's common stock, plus, if the dividends per share paid on the common stock are greater than the dividends per share
paid on the preferred stock on an "as if converted" basis, then the Board of Directors shall declare an additional dividend such that the
dividends per share paid on the preferred stock on an "as if converted" basis, shall equal the dividends per share paid on the common stock.
1998 EXECUTIVE OFFICER STOCK PLAN
The Company has in effect a 1998 Executive Officer Stock Plan (the 1998 Plan), which replaced the 1990 Stock Option Plan terminated in
April 1998, the 1981 Stock Option Plan terminated in October 1990, and the 1987 Executive Long Term Stock Option Plan terminated in July
1995. Options granted before these plans' termination dates remain outstanding in accordance with their terms. Options may be granted under
the 1998 Plan to the Chairman of the Board of Directors, executive officers of the Company at the
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1998 1997 1996
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Computed expected tax (benefit)...................................... $ 115 $ (366) $ (453)
State taxes, net of federal effect................................... 10 (3) (48)
Indefinitely invested earnings of foreign subsidiaries............... (15) -- --
Purchase accounting and asset acquisitions........................... 8 158 --
Valuation allowance.................................................. (97) 208 --
Other individually immaterial items.................................. (1) 3 22
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Provision (benefit) for income taxes................................. $ 20 $ -- $ (479)
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Effective tax rate................................................... 6% 0% (37)%