Apple 1999 Annual Report Download - page 60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--SHAREHOLDERS' EQUITY (CONTINUED)
In December 1997, the Board of Directors approved an option exchange program allowing employees to exchange all (but not less than all) of
their existing options (vested and unvested) with an exercise price greater than $13.6875, on a one-for-one basis for new options with an
exercise price of $13.6875, the fair market value of the Company's common stock on December 19, 1997, and a new four year vesting schedule
beginning in December 1997. A total of 4.7 million options with a weighted-average exercise price of $19.90 per share were exchanged for
new options as a result of this program.
In July 1997, the Board of Directors approved an option exchange program allowing employees to exchange all (but not less than all) of their
existing options (vested and unvested) to purchase Apple common stock (other than options granted and assumed from NeXT) for options
having an exercise price of $13.25 and a new three year vesting period beginning in July of 1997. Approximately 7.9 million options were
repriced under this program.
NOTE 7--STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its employee stock options and employee stock purchase plan shares because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in
valuing employee stock options and employee stock purchase plan shares. Under APB Opinion No. 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is
recognized.
Pro forma information regarding net income (loss) per share is required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options granted and employee stock purchase plan purchases subsequent to September 29, 1995, under the
fair value method of that statement. The fair values for these options and stock purchases were estimated at the date of grant and beginning of
the period, respectively, using a Black-Scholes option pricing model. The weighted-
average fair value per share of options granted during 1998
and 1997 includes the excess value of the repriced options granted during those fiscal years less the value of the related forfeited options on the
date the repriced options were granted. The assumptions used for each of the last three fiscal years and the resulting estimate of weighted-
average fair value per share of options granted during those years are as follows:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because the
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1999 1998 1997
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Expected life of options.................... 4 years 3.5 years 3 years
Expected life of stock purchases............ 6 months 6 months 6 months
Interest rate--stock options................ 5.02% 5.54% 6.3%
Interest rate--stock purchases.............. 4.89% 5.37% 5.3%
Volatility--stock options................... 55% 78% 74%
Volatility--stock purchases................. 59% 56% 52%
Dividend yields............................. 0 0 0
Weighted-average fair value of options
granted during the year................... $19.22 $12.98 $7.49