Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report 24 131K
2: EX-10 Material Contract 6 27K
3: EX-10 Material Contract 5 22K
4: EX-10 Material Contract 13 72K
5: EX-10 Material Contract 16 73K
6: EX-10 Material Contract 5 22K
7: EX-10 Material Contract 2 11K
8: EX-10 Material Contract 11 40K
9: EX-10 Material Contract 2 10K
10: EX-10 Material Contract 32 111K
11: EX-11 Statement re: Computation of Earnings Per Share 2 8K
12: EX-27 Art. 5 FDS for the Third Quarter of Fy96 Form 10-Q 2 8K
___________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 28, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-10030
APPLE COMPUTER, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2404110
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
1 Infinite Loop 95014
Cupertino California [Zip Code]
[Address of principal executive offices]
Registrant's telephone number, including area code: (408) 996-1010
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
124,478,256 shares of Common Stock Issued and Outstanding as of August 9, 1996
___________________________________________________________________________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in millions, except per share amounts)
[Download Table]
THREE MONTHS ENDED NINE MONTHS ENDED
June 28, June 30, June 28, June 30,
1996 1995 1996 1995
Net sales $2,179 $2,575 $7,512 $8,059
Costs and expenses:
Cost of sales 1,776 1,847 7,055 5,822
Research and development 155 168 458 443
Selling, general and
administrative 364 404 1,209 1,205
Restructuring costs -- (6) 207 (23)
2,295 2,413 (8,929) 7,447
Operating income (loss) (116) 162 (1,417) 612
Interest and other income
(expense), net 65 2 82 (33)
Income (loss) before provision
(benefit) for income taxes (51) 164 (1,335) 579
Provision (benefit) for income
taxes (19) 61 (494) 215
Net income (loss) $ (32) $ 103 $ (841) $ 364
Earnings (loss) per common
and common equivalent share $(0.26) $ 0.84 $(6.81) $ 2.97
Cash dividends paid per
common share $ -- $ .12 $ .12 $ 0.36
Common and common equivalent
shares used in the
calculations of earnings
(loss) per share (in
thousands) 123,735 123,203 123,463 122,482
See accompanying notes.
2
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
[Download Table]
June 28, September 29,
1996 1995
(Unaudited)
Current assets:
Cash and cash equivalents $1,359 $ 756
Short-term investments -- 196
Accounts receivable, net of allowance
for doubtful accounts of $96 ($87 at
September 29, 1995) 1,292 1,931
Inventories:
Purchased parts 387 841
Work in process 59 291
Finished goods 615 643
1,061 1,775
Deferred tax assets 401 251
Other current assets 341 315
Total current assets 4,454 5,224
Property, plant, and equipment:
Land and buildings 506 504
Machinery and equipment 573 638
Office furniture and equipment 138 145
Leasehold improvements 189 205
1,406 1,492
Accumulated depreciation and amortization (791) (781)
Net property, plant, and equipment 615 711
Other assets 276 296
$5,345 $6,231
See accompanying notes.
3
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
[Download Table]
June 28, September 29,
1996 1995
(Unaudited)
Current liabilities:
Short-term borrowings $ 187 $ 461
Accounts payable 762 1,165
Accrued compensation and employee benefits 125 131
Accrued marketing and distribution 208 206
Accrued restructuring costs 159 --
Other current liabilities 485 362
Total current liabilities 1,926 2,325
Long-term debt 949 303
Deferred tax liabilities 450 702
Shareholders' equity:
Common stock, no par value; 320,000,000
shares authorized; 123,785,350 shares
issued and outstanding at June 28, 1996
(122,921,601 shares at September 29, 1995) 423 398
Retained earnings 1,609 2,464
Accumulated translation adjustment and other (12) 39
Total shareholders' equity 2,020 2,901
$5,345 $6,231
See accompanying notes.
4
APPLE COMPUTER, INC.
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
[Download Table]
NINE MONTHS ENDED
June 28, June 30,
1996 1995
Cash and cash equivalents, beginning of the period $ 756 $1,203
Operations:
Net income (loss) (841) 364
Adjustments to reconcile net income (loss) to cash
generated by operations:
Depreciation and amortization 110 104
Net book value of property, plant, and equipment
retirements 43 1
Changes in assets and liabilities:
Accounts receivable 639 28
Inventories 714 (279)
Deferred tax assets (150) 7
Other current assets (26) (53)
Accounts payable (403) 167
Accrued restructuring costs 159 (43)
Other current liabilities 119 5
Deferred tax liabilities (252) 132
Cash generated by operations 112 433
Investments:
Purchase of short-term investments (244) (1,558)
Proceeds from sale of short-term investments 440 1,105
Purchase of property, plant, and equipment (55) (110)
Other (33) (23)
Cash generated by (used for) investment
activities 108 (586)
Financing:
Increase (decrease) in short-term borrowings (274) 114
Increase (decrease) in long-term borrowings 646 (4)
Increases in common stock, net of related tax benefits 25 51
Cash dividends (14) (43)
Cash generated by financing activities 383 118
Total cash generated (used) 603 (35)
Cash and cash equivalents, end of the period $1,359 $1,168
See accompanying notes.
5
APPLE COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Interim information is unaudited; however, in the opinion of the
Company's management, all adjustments necessary for a fair statement of interim
results have been included. All adjustments are of a normal recurring nature
unless specified in a separate note included in these Notes to Consolidated
Financial Statements. The results for interim periods are not necessarily
indicative of results to be expected for the entire year. These financial
statements and notes should be read in conjunction with the Company's annual
consolidated financial statements and the notes thereto for the fiscal year
ended September 29, 1995, included in its Annual Report on Form 10-K for the
year ended September 29, 1995 (the "1995 Form 10-K").
2. In the third quarter of 1996, the Company issued $661 million aggregate
principal amount of 6% unsecured convertible subordinated notes (the "Notes")
to certain qualified parties in a private placement. The Notes were sold at
100% of par. The Notes pay interest semi-annually and mature on June 1, 2001.
The Notes are convertible by their holders at any time after September 5, 1996
at a conversion price of $29.205 per share subject to adjustments as defined in
the Note agreement. The Notes are redeemable by the Company at 102.4% of the
principal amount, plus accrued interest, for the 12-month period beginning June
1, 1999, and at 101.2% of the principal amount, plus accrued interest, for the
12-month period beginning June 1, 2000. The Notes are subordinated to all
present and future senior indebtedness of the Company as defined in the Note
agreement. In addition, the Company incurred approximately $15 million of
costs associated with the issuance of the Notes. These costs are accounted for
as a deduction from the face amount of the Notes and will be amortized over the
life of the Notes.
3. In the second quarter of 1996, the Company announced and began to
implement a restructuring plan aimed at reducing costs and restoring
profitability to the Company's operations. The restructuring plan was
necessitated by decreased demand for Company products and the Company's
adoption of a new strategic direction. The Company's restructuring actions
consist primarily of terminating approximately 2,800 full-time employees (not
including employees who were hired by SCI Systems, Inc., the purchaser of the
Company's Fountain, Colorado manufacturing facility), canceling or vacating
certain facility leases as a result of these employee terminations, writing
down operating assets to be sold as a result of downsizing operations and
outsourcing various operational functions, and canceling contracts as a result
of terminating eWorld(trademark), Apple's on-line service. These actions have
resulted in a charge of $207 million, including cash expenditures of $44
million and non-cash asset write-downs of $4 million, through the third
quarter. The Company expects that the remaining $159 million accrued balance
at June 28, 1996 will result in cash expenditures of $103 million over the next
12 months and $12 million thereafter. The Company expects that most of the
contemplated restructuring actions will be completed within the next twelve
months and will be financed through current working capital and continued
short-term borrowings. In addition, in connection with the sale of its
Fountain, Colorado manufacturing facility, the Company is obligated to purchase
certain percentages of its total annual volumes of CPUs and logic boards from
SCI Systems, Inc. over each of the next three years. The Company believes
that it
will meet these obligations.
The following table depicts the restructuring activity through the third
quarter of 1996: (In millions)
[Download Table]
Category Total Restructuring Balance at
Charge Spending June 28, 1996
Payments to employees involuntarily
terminated (C) $115 $39 $76
Payments on canceled or vacated facility
leases (C) 26 3 23
Write-down of operating assets to be
sold (N) 48 4 44
Payments on canceled contracts (C) 18 2 16
$207 $48 $159
C: Cash; N: Noncash
6
4. Interest and other income (expense), net, consists of the following:
(In millions)
[Download Table]
Three Months Ended Nine Months Ended
June 28, June 30, June 28, June 30,
1996 1995 1996 1995
Interest income $10 $32 $38 $76
Interest expense (12) (16) (42) (33)
Foreign currency gain (loss) 1 4 29 (40)
Net premiums and discounts paid on
foreign exchange instruments (3) (17) (13) (34)
Other income (expense), net 69 (1) 70 (2)
$65 $2 $82 $(33)
5. The Company's cash equivalents consist primarily of U.S. Government
securities, Euro-dollar deposits, and commercial paper with maturities of three
months or less at the date of purchase. Short-term investments consisted
principally of Euro-dollar deposits and commercial paper with maturities
between three and twelve months. The Company's marketable equity securities
consist of securities issued by U.S. corporations and are included in "Other
assets" on the accompanying balance sheet. The Company's cash equivalents,
short-term investments, and marketable equity securities are classified and
accounted for as available-for-sale, and the cash equivalents and short-term
investments are generally held until maturity. The Company's cash and cash
equivalent balance includes $173 million pledged as collateral to support
letters of credit primarily associated with the Company's purchase commitments
under the terms of the sale of the Company's Fountain, Colorado manufacturing
facility to SCI Systems, Inc.
The adjustments recorded to shareholders' equity for unrealized holding
gains (losses) on available-for-sale cash equivalents and marketable equity
securities were not material, either individually or in the aggregate, at June
28, 1996. The gross realized gains recorded to earnings on sales of available-
for-sale securities were $69 million and $71 million for the three and nine
months ended June 28, 1996, respectively.
6. U.S. income taxes have not been provided on a cumulative total of $395
million of undistributed earnings of certain of the Company's foreign
subsidiaries. It is intended that these earnings will be indefinitely invested
in operations outside of the United States. It is not practicable to determine
the income tax liability that might be incurred if these earnings were to be
distributed. Except for such indefinitely invested earnings, the Company
provides for federal and state income taxes currently on undistributed earnings
of foreign subsidiaries.
The Internal Revenue Service ("IRS") has proposed federal income tax
deficiencies for the years 1984 through 1991, and the Company has made certain
prepayments thereon. The Company contested the proposed deficiencies for the
years 1984 through 1988, and most of the issues in dispute for these years have
been resolved. On June 29, 1995, the IRS issued a notice of deficiency
proposing increases in the amount of the Company's federal income taxes for the
years 1989 through 1991. The Company has filed a petition with the United
States Tax Court to contest these alleged tax deficiencies. Management
believes that adequate provision has been made for any adjustments that may
result from these tax examinations.
7. Earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares attributable to stock options
outstanding during the period. Loss per share is computed using the weighted
average number of common shares outstanding during the period.
7
8. Certain prior year amounts on the Consolidated Statements of Cash Flows
have been reclassified to conform to the current period presentation.
9. No dividend has been declared for the third quarter of 1996, and the
Board of Directors anticipates that for the foreseeable future the Company will
retain any earnings for use in the operation of its business.
10. The information set forth in Item 1 of Part II hereof is hereby
incorporated by reference.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the consolidated
financial statements and notes thereto. All information is based on Apple's
fiscal calendar.
(Tabular information: Dollars in millions, except per share amounts)
Except for historical information contained herein, the statements set forth in
this Item 2 are forward-looking and involve risks and uncertainties. For
information regarding potential factors that could affect the Company's
financial results refer to pages of this Management Discussion and Analysis
of Financial Condition and Results of Operations under the heading "Factors
That May Affect Future Results and Financial Condition."
Results of Operations
[Download Table]
Third Quarter Nine Months
1996 1995 Change 1996 1995 Change
Net sales $2,179 $2,575 (15.4%) $7,512 $8,059 (6.8%)
Gross margin $403 $728 (44.6%) $457 $2,237 (79.6%)
Percentage of net sales 18.5% 28.3% 6.1% 27.8%
Operating expenses $519 $566 (8.3%) $1,874 $1,625 15.3%
Percentage of net sales 23.8% 22.0% 24.9% 20.2%
Restructuring costs -- $(6) NM $207 $(23) NM
Percentage of net sales -- (0.2%) 2.8% (0.3%)
Interest and other income
(expense), net $65 $2 3,150% $82 $(33) NM
Net income (loss) ($32) $103 (131.1%) ($841) $364 (331.0%)
Earnings (loss) per
share ($.26) $0.84 (131.0%) ($6.81) $2.97 (329.3%)
NM: Not meaningful
Overview
Over the last six months the Company has experienced a significant decline in
net sales, units shipped and share of the personal computer market. For the
quarter ended June 28, 1996, the number of the Company's Macintosh computers
shipped worldwide declined by 16% when compared with the corresponding quarter
of 1995. Moreover, according to an industry source, in the third quarter of
1996 as compared to the third quarter of 1995, the Company's share of the
worldwide and U.S. personal computer markets declined to 5.3% from 7.4%, and to
7.4% from 10.6%, respectively. This decline in demand, coupled with intense
price competition throughout the industry, has resulted in the Company's
decision to develop and announce key elements of a new strategic direction
intended to improve the Company's competitiveness and restore its
profitability. The Company intends to develop and market products and services
more selectively targeted to education, home and business segments. In moving
in this new strategic direction, the Company expects to reduce the number of
new product introductions and the number of products in certain categories
within its current product portfolio.
9
Net Sales
Net sales for the third quarter of 1996 decreased when compared with the
corresponding quarter of 1995, resulting from a decrease in Macintosh
(registered trademark) computer net sales and in net sales of peripheral
products such as displays and printers. Total Macintosh computer unit sales
decreased 16% in the third quarter when compared with the corresponding
quarter of 1995, primarily as a result of a decline in worldwide demand for
most product families, primarily entry level products, due principally to
customer concerns regarding the Company's strategic direction, financial
condition and future prospects, and as a result of delays in the shipment of
certain Powerbook products due to quality problems. The average aggregate
revenue per Macintosh computer unit decreased 8% in the third quarter when
compared with the corresponding quarter of 1995, primarily due to pricing
actions across all product lines in order to stimulate demand, partially
offset by increased revenues from a shift in the mix towards the Company's
newer products and products with multi-media configurations, which have higher
average selling prices.
Net sales for the first nine months of 1996 decreased when compared with the
first nine months of 1995, resulting from a decrease in Macintosh computer net
sales and in net sales of peripheral products such as displays and printers.
Total Macintosh computer unit sales decreased 5% in the first nine months of
1996, when compared with the corresponding period of 1995. Unit sales
increased in the first quarter of 1996 when compared with the corresponding
quarter of 1995, but were more than offset by unit sales decreases in the
second and third quarters of 1996 when compared with the corresponding quarters
of 1995. The average aggregate revenue per Macintosh computer unit did not
change in the first nine months of 1996, when compared with the corresponding
period of 1995 primarily due to increased revenues from a shift in the mix
towards the Company's newer products and products with multi-media
configurations, which have higher average selling prices, offset by pricing
actions across all product lines in order to stimulate demand.
International net sales decreased 9% in the third quarter and did not change
in the first nine months of 1996, respectively, when compared with the
corresponding periods of 1995. The decrease in the third quarter was
attributable to a decrease in net sales in Europe due to a decrease in total
Macintosh computer unit sales, partially offset by higher average aggregate
revenue per Macintosh computer unit. The decrease in the third quarter was
also attributable to a decrease in net sales in Japan due to a decrease in the
average aggregate revenue per Macintosh computer unit, partially offset by an
increase in total Macintosh computer unit sales. The flat net sales in the
first nine months primarily reflects strong net sales growth in Japan and
certain countries within Europe during the first quarter of 1996, offset by
decreases in net sales in the second and third quarters. International net
sales represented 52% and 53% of total net sales for the third quarter and
first nine months of 1996, respectively, compared with 49% and 50% for the
corresponding periods of 1995. Domestic net sales decreased by approximately
21% and 13% in the third quarter and first nine months of 1996, respectively,
when compared with the corresponding periods of 1995.
The Company's resellers typically purchase products on an as-needed basis.
Resellers frequently change delivery schedules and order rates depending on
changing market conditions. Unfilled orders ("backlog") can be, and often are,
canceled at will. The Company attempts to fill orders on the requested
delivery schedules. The Company's backlog increased to approximately $468
million at August 2, 1996, from approximately $369 million at May 3, 1996.
This increase in backlog is primarily the result of an increase in orders due
to certain new product introductions. The Company estimates that product
backlog would have been approximately $430 million at August 2, 1996 if certain
quality problems with certain Powerbook products had not occurred.
In the Company's experience, the actual amount of product backlog at any
particular time is not necessarily a meaningful indication of its future
business prospects. In particular, backlog often increases in anticipation of
or immediately following introduction of new products because of over-ordering
by dealers anticipating shortages. Backlog often is reduced sharply once
dealers and customers believe they can obtain sufficient supply. Because of
the foregoing, as well as other factors affecting the Company's backlog,
backlog should not be considered a reliable indicator of the Company's ability
to achieve any particular level of revenue or financial performance.
The Company believes that net sales will remain below prior years levels
through at least the first quarter of 1997.
10
Gross Margin
Gross margin represents the difference between the Company's net sales and its
cost of goods sold. The amount of revenue generated by the sale of products is
influenced in significant part by the price set by the Company for its products
relative to competitive products. The cost of goods sold is based primarily on
the cost of components and, to a lesser extent, direct labor costs. Because
the Company uses some components that are not common to the rest of the
personal computer industry (including certain ASICs), its component costs may
be higher than those incurred by other manufacturers. The type and cost of
components included in particular configurations of the Company's products
(such as memory and disk drives) are often directly related to the need to
market products in configurations competitive with other manufacturers.
Competition in the personal computer industry is intense, and, in the short
term, frequent changes in pricing and product configuration are often necessary
in order to remain competitive. Accordingly, gross margin as a percentage of
net sales can be significantly influenced in the short term by actions
undertaken by the Company in response to industrywide competitive pressures.
Gross margin decreased to 18.5% and 6.1% during the third quarter and first
nine months of 1996, respectively, when compared with the corresponding periods
of 1995. The decrease in the third quarter of 1996 as compared to the
corresponding quarter of 1995 is due to the Company's response to extreme
competitive actions by other companies attempting to gain market share, which
included pricing actions in the U.S., Japan and Europe across most product
lines, partially offset by a decrease in the cost of certain product
components. The decrease in gross margin in the first nine months of 1996 as
compared with the first nine months of 1995 is primarily a result of a $616
million charge in the second quarter of 1996 principally for the write-down of
certain inventory, as well as the cost to cancel excess component orders,
necessitated by significantly lower than expected demand for many of the
Company's products, primarily its entry level products. Also, the Company
separately incurred $77 million in charges in the second and third quarters
that reflect the estimated cost to correct certain quality problems in certain
entry level, Performa and Powerbook products, covering both goods held in
inventory and shipped goods. In addition, gross margins were adversely
affected by aggressive pricing actions in Japan, particularly severe in the
first quarter of 1996, in response to extreme competitive actions by other
companies attempting to gain market share, and pricing actions in the U.S. and
Europe across all product lines in order to stimulate demand.
The decrease in gross margin levels in the third quarter and first nine months
of 1996 compared with the corresponding periods of 1995 was slightly offset by
hedging gains less the effects of a stronger U.S. dollar relative to certain
foreign currencies. The Company's operating strategy and pricing take into
account changes in exchange rates over time; however, the Company's results of
operations can be significantly affected in the short term by fluctuations in
foreign currency exchange rates.
Although the Company is taking actions to improve gross margins as it
implements its new strategic plan, it is anticipated that gross margins will
continue to remain under pressure due to a variety of factors, including
continued industrywide pricing pressures, increased competition, compressed
product life cycles, and the need to sell through current inventory at prices
reflecting the recent write-downs.
[Download Table]
Research and Development Third Quarter Nine Months
1996 1995 Change 1996 1995 Change
Research and development $155 $168 (7.7%) $458 $443 3.4%
Percentage of net sales 7.1% 6.5% 6.1% 5.5%
Research and development expenditures for the third quarter of 1996 decreased
when compared with the corresponding quarter of 1995 as a result of the
termination of certain third party joint development efforts. The increase in
the first nine months is primarily due to higher project and headcount related
spending in the first six months of 1996 as compared to the first six months of
1995, partially offset by a decrease in certain research and development
expenditures in the third quarter of 1996 as compared to the third quarter of
1995 as previously discussed. The increase as a percentage of net sales in the
third quarter of 1996 when compared with the corresponding quarter of 1995 was
a result of the decrease in the level of net sales.
11
As part of the Company's restructuring plan and new strategic direction, the
Company expects to reduce the number of employees engaged in research and
development activities and to streamline its product offerings. As a result,
the Company expects that research and development expenditures will decrease
relative to historical levels after significant portions of the restructuring
plan have been completed. Nevertheless, the Company believes that continued
investments in research and development are critical to its future growth and
competitive position in the marketplace and are directly related to continued,
timely development of new and enhanced products. The Company believes a
greater portion of its research and development efforts will be conducted
through collaborations with third parties. In addition, where appropriate the
Company plans to acquire and license technologies from third parties.
[Download Table]
Selling, General and Third Quarter Nine Months
Administrative 1996 1995 Change 1996 1995 Change
Selling, general and
administrative $364 $404 (9.9%) $1,209 $1,205 0.3%
Percentage of net sales 16.7% 15.7% 16.1% 15.0%
Selling, general and administrative expenses decreased in the third quarter and
remained essentially flat in the first nine months of 1996 when compared with
the corresponding periods of 1995. The decrease in the third quarter of 1996
as compared with the same quarter of 1995 was primarily due to reduced
advertising expenditures, while for the first nine months of 1996 as compared
with the first nine months of 1995 the spending related to marketing and
advertising programs was unchanged. The increase as a percentage of net sales
in the third quarter when compared with the corresponding quarter of 1995 was
primarily a result of the reduced overall level of net sales.
As a result of its restructuring plan, the Company expects that selling,
general and administrative expenditures will decrease relative to historical
levels.
[Download Table]
Restructuring Costs Third Quarter Nine Months
1996 1995 Change 1996 1995 Change
Restructuring costs -- ($6) NM $207 ($23) NM
Percentage of net sales -- 0% 2.8% 0%
For information regarding the Company's restructuring actions initiated in the
second quarter of 1996, refer to Note 3 of the Notes to Consolidated Financial
Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future
Results and Financial Condition as well as Liquidity and Capital Resources in
Part I, Item II of this Quarterly Report on Form 10-Q, which information is
hereby incorporated by reference.
In the first and third quarters of 1995, the Company lowered its estimates of
the total remaining costs associated with its restructuring plan initiated in
the third quarter of 1993 and recorded an adjustment that increased income by
$17 million and $6 million, respectively.
12
[Download Table]
Interest and Other Third Quarter Nine Months
Income (Expense), Net 1996 1995 Change 1996 1995 Change
Interest and other
income (expense), net $65 $2 3,150% $82 ($33) NM
Interest and other income (expense), net, increased in the third quarter and
increased from expense to income in the first nine months of 1996 when compared
to the corresponding periods in 1995, primarily due to realized gains on sales
of available-for-sale securities of $69 million in the third quarter of 1996,
and favorable variances related to realized and unrealized foreign exchange
hedging gains (losses) as a result of less volatility in the foreign exchange
markets in the second quarter of 1996 as compared to the second quarter of
1995, offset by unfavorable variances in interest income related primarily to
lower average cash balances and lower interest earnings rates. The Company's
cost of funds has increased as a result of the downgrading from January 1996
through May 1996 of its short-term debt to NP and C by Moody's Investor
Services and Standard and Poor's Rating Agency, respectively, and of its long-
term debt to B1 and B+ by Moody's Investor Services and Standard and Poor's
Rating Agency, respectively.
[Download Table]
Provision (Benefit) for Income
Taxes
Third Quarter Nine Months
1996 1995 Change 1996 1995 Change
Provision (benefit)
for income taxes ($19) $61 (131.1%) ($494) $215 329.8%
Effective tax rate 37% 37% 37% 37%
The Company's balance sheet at June 28, 1996, contains a total deferred tax
asset of $401 million. A substantial portion of this asset is realizable based
on the ability to offset existing deferred tax liabilities. Realization of
approximately $100 million of the asset is dependent upon the Company's ability
to generate approximately $285 million of future U.S. taxable income.
Management believes that it is more likely than not that the asset will be
realized based upon forecasted income. However, there can be no assurance that
the Company will meet its expectations of future income. The Company will
continue to evaluate the realizability of the deferred tax assets quarterly by
assessing the need for a valuation allowance.
For additional information regarding the Company's Income Tax Provision
(Benefit), refer to Note 6 of the Notes to Consolidated Financial Statements
(Unaudited) in Part I, Item I of this Quarterly Report on Form 10-Q, which
information is hereby incorporated by reference.
13
Factors That May Affect Future Results and Financial Condition
The Company's future operating results and financial condition are dependent on
the Company's ability to successfully develop, manufacture, and market
technologically innovative products in order to meet dynamic customer demand
patterns. Inherent in this process are a number of factors that the Company
must successfully manage in order to achieve favorable future operating results
and financial condition. Potential risks and uncertainties that could affect
the Company's future operating results and financial condition include, without
limitation: continued competitive pressures in the marketplace; the effect any
reaction to such competitive pressures has on inventory levels and inventory
valuations; the ability of the Company to make timely delivery to the
marketplace of successful technological innovations; the effects of significant
adverse publicity; the Company's ability to supply product in certain
categories; the impact of uncertainties concerning the Company's strategic
direction and financial condition on revenue and liquidity; the effect of
degradation in the Company's liquidity; and the effect of restructuring
actions.
The Company expects to continue to incur operating losses throughout at least
the remainder of 1996, if not longer.
Restructuring of Operations
In the second quarter of 1996, the Company formulated a new strategic direction
and announced certain restructuring actions aimed at reducing its cost
structure, improving its competitiveness and restoring profitability. There
are several risks inherent in the Company's efforts to transition to a new cost
structure. These include the risk that the Company will not be able to reduce
expenditures quickly enough to restore profitability and the risk that cost-
cutting initiatives will impair the Company's ability to innovate and remain
competitive in the computer industry.
As part of its restructuring effort, the Company has begun to implement a new
business model. Implementation of the new business model involves several
risks, including the risk that by simplifying its product line the Company will
increase its dependence on fewer products, potentially reduce overall sales and
increase its reliance on unproven products and technology. Another risk of the
new business model is that by increasing the proportion of the Company's
products to be produced under outsourcing arrangements, the Company could lose
control of the quality of the products manufactured and lose the flexibility to
make timely changes in production schedules in order to respond to changing
market conditions. In addition, the new business model could adversely affect
employee morale, thereby damaging the Company's ability to retain and motivate
employees. Also, because the new business model contemplates that the Company
will reduce its research and development expenditures by, among other things,
relying to a greater extent on collaboration and licensing arrangements with
third parties, the Company will have less direct control over its research and
development efforts and its ability to create innovative new products may be
reduced. Finally, even if the new business model is successfully implemented,
there can be no assurance that it will effectively resolve the various issues
currently facing the Company. In addition, although the Company believes that
the action that it is taking under its restructuring plan should help restore
marketplace confidence in the Macintosh platform, there can be no assurance
that such actions will succeed.
For the foregoing reasons there can be no assurance that the current
restructuring actions will achieve their goals or that similar actions will not
be required in the future. The Company's future operating results and
financial condition could be adversely affected should it encounter difficulty
in effectively managing the transition to the new business model and cost
structure.
For more information regarding the Company's restructuring actions initiated
in the second quarter of 1996, refer to Note 3 of the Notes to Consolidated
Financial Statements (Unaudited) in Part I, Item I, and to Liquidity and
Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q,
which information is hereby incorporated by reference.
Product Introductions and Transitions
Due to the highly volatile nature of the personal computer industry, which is
characterized by dynamic customer demand patterns and rapid technological
advances, the Company frequently introduces new products and product
enhancements. The success of new product introductions is dependent on a
number of factors, including market acceptance, the Company's ability to manage
the risks associated with product transitions, the availability of application
software for new products, the effective management of inventory levels in line
with anticipated product demand, the manufacturing of products in appropriate
quantities to meet anticipated demand, and the risk that new products may have
quality or other defects in the early stages of introduction. Accordingly, the
Company cannot determine the ultimate effect that new products will have on its
sales or results of operations. In addition, the uncertainties and risks
associated with new product introductions may be increased as a result of the
Company's new business model which will, in part, emphasize a refocusing of
product offerings and the introduction of new products for key growth segments.
14
The rate of product shipments immediately following introduction of a new
product is not necessarily an indication of the future rate of shipments for
that product, which depends on many factors, some of which are not under the
control of the Company. These factors may include initial large purchases by a
small segment of the user population that tends to purchase new technology
prior to its acceptance by the majority of users ("early adopters"); purchases
in satisfaction of pent-up demand by users who anticipated new technology and,
as a result, deferred purchases of other products; and over-ordering by dealers
who anticipate shortages due to the aforementioned factors. The preceding may
also be offset by other factors, such as the deferral of purchases by many
users until new technology is accepted as "proven" and for which commonly used
software products are available; and the reduction of orders by dealers once
they believe they can obtain sufficient supply of products previously in
backlog.
Backlog is often volatile after new product introductions due to the
aforementioned demand factors, often increasingly coincident with introduction,
and then decreasing once dealers and customers believe they can obtain
sufficient supply of products.
The measurement of demand for newly introduced products is further complicated
by the availability of different product configurations, which may include
various types of built-in peripherals and software. Configurations may also
require certain localization (such as language) for various markets and, as a
result, demand in different geographic areas may be a function of the
availability of third-party software in those localized versions. For example,
the availability of European-language versions of software products
manufactured by U.S. producers may lag behind the availability of U.S. versions
by a quarter or more. This may result in lower initial demand for the Company's
new products outside the United States, even though localized versions of the
Company's products may be available.
The greater integration of functions and complexity of operations of the
Company's products also increase the risk that latent defects or other faults
could be discovered by customers or end-users after volumes of products have
been produced or shipped. If such defects were significant, the Company could
incur material recall and replacement costs under product warranties.
Competition
The personal computer industry is highly competitive and is characterized by
aggressive pricing practices, downward pressure on gross margins, frequent
introduction of new products, short product life cycles, continual improvement
in product price/performance characteristics, price sensitivity on the part of
consumers and a large number of competitors. In the first nine months of 1996,
the Company's results of operations and financial condition were, and in the
near future are expected to be, adversely affected by industrywide pricing
pressures and downward pressures on gross margins. The industry has also been
characterized by rapid technological advances in software functionality and
hardware performance and features based on existing or emerging industry
standards. Some of the Company's competitors have greater financial,
marketing, manufacturing and technological resources, broader product lines
and larger installed customer bases than those of the Company.
The Company's future operating results and financial condition may be affected
by overall demand for personal computers and general customer preferences for
one platform over another or one set of product features over another.
15
The Company is currently the primary maker of hardware that uses the Macintosh
operating system ("Mac OS"). The Mac OS has a minority market share in the
personal computer market, which is dominated by makers of computers that run
the MS-DOS(registered trademark) and Microsoft Windows(trademark) operating
systems. The Company believes that the Mac OS, with its perceived advantages
over MS-DOS and Windows, has been a driving force behind sales of the Company's
personal computer hardware for the past several years. Recent innovations in
the Windows platform, including those introduced by Windows 95, have added
features to the Windows platform similar to those offered by the Mac OS. The
Company is currently taking and will continue to take steps to respond to the
competitive pressures being placed on its personal computer sales as a result
of the recent innovations in the Windows platform. The Company's future
operating results and financial condition may be affected by its ability to
increase the installed base for the Macintosh platform. The Company recently
announced a new strategy with respect to updating its operating system. Rather
than introduce a comprehensive new operating system in a single release, the
Company intends to issue periodic releases consisting of discrete operating
system components. The Company expects that this will enable it to introduce
some new functionality for the operating system sooner than it would be able to
introduce a complete new operating system. As part of its efforts to increase
the installed base for the Macintosh platform, the Company announced the
licensing of the Mac OS to other personal computer vendors in January 1995,
and several vendors currently sell products that utilize the Macintosh
operating system. The Company believes that licensing the operating system
will result in a broader installed base on which software vendors can develop
and provide technical innovations for the Macintosh platform. However, there
can be no assurance that the installed base will be broadened by the licensing
of the operating system or that licensing will result in an increase in the
number of application software titles or the rate at which vendors will bring
to market application software based on the Mac OS. In addition, as a result
of licensing its operating system, the Company is forced to compete with other
companies producing Mac OS-based computer systems. The benefits to the Company
from licensing the Mac OS to third parties may be more than offset by the
disadvantages of being required to compete with them.
As a supplemental means of addressing the competition from MS-DOS and Windows,
the Company has devoted substantial resources toward developing personal
computer products capable of running application software designed for the
MS-DOS or Windows operating systems ("Cross-Platform Products"). These products
include both the RISC-based PowerPC 601 microprocessor and the 486 DX2/66
microprocessor, which enable users to run concurrently applications that
require the Mac OS, MS-DOS, Windows 3.1 or Windows 95 operating systems.
During the third quarter of 1996 the Company began shipment of Cross-Platform
Products that include the Pentium or 586-class chip, or in which a Pentium or
586-class microprocessor can be installed through the use of an add-on card.
Depending on customer demand, the Company may supply customers who purchase
Cross-Platform Products with Windows operating system software under licensing
agreements with Microsoft. However, in order to do so, the Company will need
to enter into one or more agreements with certain Microsoft distributors.
On November 7, 1994, the Company reached an agreement with International
Business Machines Corporation ("IBM") and Motorola, Inc. on a new hardware
reference platform for the PowerPC microprocessor that is intended to deliver
a much wider range of operating system and application choices for computer
customers. As a result of this agreement, the Company is moving forward with
its efforts to make the Macintosh operating system available on the common
platform. In line with its efforts, on November 13, 1995, the Company, IBM,
and Motorola, Inc. announced the availability of the "PowerPC Platform"
specifications, which define a "unified" personal computer architecture in
order to give access to both the Power Macintosh platform and the PC
environment. The Company's future operating results and financial condition
may be affected by its ability to continue to implement this agreement and
to manage the risk associated with the transition to this new hardware
reference platform.
Decisions by customers to purchase the Company's personal computers, as opposed
to MS-DOS or Windows-based systems, are often based on the availability of
third-party software for particular applications. The Company believes that
the availability of third-party application software for the Company's hardware
products depends in part on the third-party developers' perception and analysis
of the relative benefits of developing, maintaining and upgrading such software
for the Company's products versus software for the larger MS-DOS and Windows
market. This analysis is based on factors such as the perceived strength of
the Company and its products, the anticipated potential revenue that may be
earned, and the costs of developing such software products. To the extent the
Company's recent financial losses have caused software developers to question
the Company's position in the personal computer market, they could be less
inclined to develop new application software or upgrade existing software for
the Company's products and more inclined to devote their resources toward
developing and upgrading software for the larger MS-DOS and Windows market.
Microsoft Corporation is an important developer of application software for the
Company's products. Accordingly, Microsoft's interest in producing application
software for the Company's products may be influenced by Microsoft's perception
of its interests as the vendor of the Windows operating systems.
16
The Company's ability to produce and market competitive products is also
dependent on the ability of IBM and Motorola, Inc., the suppliers of the
PowerPC RISC microprocessor for certain of the Company's products, to continue
to supply to the Company microprocessors that produce superior price/
performance results compared with those supplied to the Company's competitors
by Intel Corporation, the developer and producer of the microprocessors used by
most personal computers using the MS-DOS and Windows operating systems. IBM
produces personal computers based on Intel microprocessors as well as
workstations based on the PowerPC microprocessor, and is also the developer of
OS/2, a competing operating system to the Company's Mac OS. Accordingly, IBM's
interest in supplying the Company with microprocessors for the Company's
products may be influenced by IBM's perception of its interests as a competing
manufacturer of personal computers and as a competing operating system vendor.
Recently, several competitors of the Company, including Compaq, IBM and
Microsoft, have either targeted or announced their intention to target certain
of the Company's key market segments, including education and publishing. Some
of these companies have greater financial, marketing, manufacturing and
technological resources than the Company.
The Company intends to integrate Internet capabilities into its new and
existing hardware and software platforms. There can be no assurance that the
Company will be able to successfully integrate Internet capabilities into its
products. In addition, the Internet market is rapidly evolving and is
characterized by an increasing number of market entrants who have introduced
or developed products addressing access to, or authoring or communication over,
the Internet. Some of these competitors have a significant lead over the
Company in developing products for the Internet or have significantly greater
financial, marketing, manufacturing and technological resources than the
Company, or both.
The Company's future operating results and financial condition may also be
affected by the Company's ability to successfully expand and capitalize on its
investments in other markets, such as the markets for personal digital
assistant (PDA) products.
Global Market Risks
A large portion of the Company's revenue is derived from its international
operations. As a result, the Company's operations and financial results could
be significantly affected by international factors, such as changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which the Company distributes its products. When the U.S. dollar strengthens
against other currencies, the U.S. dollar value of non-U.S. dollar-based sales
decreases. When the U.S. dollar weakens, the U.S. dollar value of non-U.S.
dollar-based sales increases. Correspondingly, the U.S. dollar value of non-
U.S. dollar-based costs increases when the U.S. dollar weakens and decreases
when the U.S. dollar strengthens. Overall, the Company is a net receiver of
currencies other than the U.S. dollar and, as such, benefits from a weaker
dollar and is adversely affected by a stronger dollar relative to major
currencies worldwide. Accordingly, changes in exchange rates, and in
particular a strengthening of the U.S. dollar, may negatively affect the
Company's consolidated sales and gross margins (as expressed in U.S. dollars).
To mitigate the short-term impact of fluctuating currency exchange rates on
the Company's non-U.S. dollar-based sales, product procurement, and operating
expenses, the Company regularly hedges its non-U.S. dollar-based exposures.
Specifically, the Company enters into foreign exchange forward and option
contracts to hedge firmly committed transactions. Currently, hedges of firmly
committed transactions do not extend beyond one year. The Company also
purchases foreign exchange option contracts to hedge certain other probable,
but not firmly committed transactions. Hedges of probable, but not firmly
committed transactions currently do not extend beyond one year. To reduce the
costs associated with these ongoing foreign exchange hedging programs, the
Company also regularly sells foreign exchange option contracts and enters into
certain other foreign exchange transactions. All foreign exchange forward and
option contracts not accounted for as hedges, including all transactions
intended to reduce the costs associated with the Company's foreign exchange
hedging programs, are carried at fair value and are adjusted on each balance
sheet date for changes in exchange rates.
17
While the Company is exposed with respect to fluctuations in the interest rates
of many of the world's leading industrialized countries, the Company's interest
income and expense is most sensitive to fluctuations in the general level of
U.S. interest rates. In this regard, changes in U.S. interest rates affect the
interest earned on the Company's cash, cash equivalents, and short-term
investments as well as interest paid on its short-term borrowings and long-term
debt. To mitigate the impact of fluctuations in U.S. interest rates, the
Company has entered into interest rate swap and option transactions. Certain
of these swaps are intended to better match the Company's floating-rate
interest income on its cash, cash equivalents, and short-term investments with
the fixed-rate interest expense on its long-term debt. The Company also enters
into interest rate swap and option transactions in order to diversify a portion
of the Company's exposure away from fluctuations in short-term U.S. interest
rates. These instruments may extend the Company's cash investment horizon up
to a maximum duration of three years.
To ensure the adequacy and effectiveness of the Company's foreign exchange and
interest rate hedge positions, as well as to monitor the risks and
opportunities of the nonhedge portfolios, the Company continually monitors its
foreign exchange forward and option positions, and its interest rate swap and
option positions on a stand-alone basis and in conjunction with its underlying
foreign currency- and interest rate-related exposures, respectively, from both
an accounting and an economic perspective. However, given the effective
horizons of the Company's risk management activities, there can be no assurance
that the aforementioned programs will offset more than a portion of the adverse
financial impact resulting from unfavorable movements in either foreign
exchange or interest rates. In addition, the timing of the accounting for
recognition of gains and losses related to mark-to-market instruments for any
given period may not coincide with the timing of gains and losses related to
the underlying economic exposures, and as such, may adversely affect the
Company's operating results and financial position. The Company generally does
not engage in leveraged hedging.
The Company's current financial condition may have an impact on the costs of
its hedging transactions, as well as the willingness of its trading partners to
enter into hedging transactions with the Company.
Inventory and Supply
In line with the Company's efforts to redesign its business model, the Company
intends to streamline its product offerings in its key usage areas in
education, business and the home. This simplification of product lines has
resulted in inventory reserves. Cancellation fees related to custom component
inventory purchased for anticipated product introductions that have been
canceled have also been paid or incurred. The Company has also separately
provided for the estimated cost to correct certain quality problems on certain
entry level, Performa and Powerbook products. Although the Company believes
its inventory and related reserves are adequate, no assurance can be given that
the Company will not incur additional inventory charges.
The Company must order components for its products and build inventory well in
advance of product shipments. Because the Company's markets are volatile and
subject to rapid technology and price changes, there is a risk that the Company
will forecast incorrectly and produce excess or insufficient inventories of
particular products. The Company's operating results and financial condition
have been and may in the future be materially adversely affected by the
Company's ability to manage its inventory levels and respond to short-term
shifts in customer demand patterns.
Certain of the Company's products are manufactured in whole or in part by
third-party manufacturers, either pursuant to design specifications of the
Company or otherwise. As a result of the Company's restructuring plan, which
includes the sale of the Company's Fountain, Colorado manufacturing facility to
SCI Systems, Inc. ("SCI") and a related manufacturing outsourcing agreement
with SCI, the proportion of the Company's products produced under outsourcing
arrangements will increase. While outsourcing arrangements may lower the fixed
cost of operations, they may also reduce the direct control the Company has
over production. It is uncertain what effect such lessened control will have
on the quality of the products manufactured or the flexibility of the Company
to respond to changing market conditions. Furthermore, any efforts by the
Company to manage its inventory under outsourcing arrangements could subject
the Company to liquidated damages or cancellation of the arrangement.
Moreover, although arrangements with such manufacturers may contain provisions
for warranty expense reimbursement, the Company remains at least initially
responsible to the ultimate consumer for warranty service. Accordingly, in the
event of product defects or warranty liability, the Company may remain
primarily liable. Any unanticipated product defect or warranty liability,
whether pursuant to arrangements with contract manufacturers or otherwise,
could adversely affect the Company's future operating results and financial
condition.
18
The Company's ability to satisfy demand for its products may be limited by the
availability of key components. The Company believes that the availability
from suppliers to the personal computer industry of microprocessors and ASICs
presents the most significant potential for constraining the Company's ability
to produce products. Specific microprocessors manufactured by Motorola, Inc.
and IBM are currently available only from single sources, while some advanced
microprocessors are currently in the early stages of ramp-up for production and
thus have limited availability. The Company and other producers in the
personal computer industry also compete for other semiconductor products with
other industries that have experienced increased demand for such products, due
to either increased consumer demand or increased use of semiconductors in their
products (such as the cellular phone and automotive industries). Finally, the
Company uses some components that are not common to the rest of the personal
computer industry (including certain ASICs). Continued availability of these
components may be affected if producers were to decide to concentrate on the
production of common components instead of components customized to meet the
Company's requirements. Such product supply constraints and corresponding
increased costs could decrease the Company's market share and adversely affect
the Company's future operating results and financial condition.
Marketing and Distribution
A number of uncertainties may affect the marketing and distribution of the
Company's products. Currently, the Company's primary means of distribution is
through third-party computer resellers. The Company also distributes product
through consumer channels such as mass-merchandise stores, consumer electronics
outlets, and computer superstores. The Company's business and financial
results could be adversely affected if the financial condition of these
resellers weakens or if resellers within consumer channels decide not to
continue to distribute the Company's products.
Uncertainty over the demand for the Company's products may cause resellers to
reduce the ordering and marketing of the Company's products. Under the
Company's arrangements with its resellers, resellers have the option to reduce
or eliminate unfilled orders previously placed, in most instances without
financial penalty. Resellers also have the option to return products to the
Company without penalty within certain limits, beyond which they may be
assessed fees. In the third quarter of 1996, the Company experienced a
reduction in ordering from historical levels by resellers due to uncertainty
concerning the Company's condition.
Other Factors
The majority of the Company's research and development activities, its
corporate headquarters, and other critical business operations are located near
major seismic faults. The Company's operating results and financial condition
could be materially adversely affected in the event of a major earthquake.
Production and marketing of products in certain states and countries may
subject the Company to environmental and other regulations which include, in
some instances, the requirement that the Company provide consumers with the
ability to return to the Company product at the end of its useful life, and
leave responsibility for environmentally safe disposal or recycling with the
Company. It is unclear what the effect of such regulation will have on the
Company's future operating results and financial condition.
The Company is currently in the process of replacing its existing transaction
systems (which include order management, distribution, and finance) with a
single integrated system as part of its ongoing effort to increase operational
efficiency. The Company's future operating results and financial condition
could be adversely affected if the Company is unable to implement and
effectively manage the transition to this new integrated system.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered to be a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods. In addition, the Company's participation in a highly dynamic
industry often results in significant volatility of the Company's common stock
price.
19
Liquidity and Capital Resources
The Company's financial position with respect to cash, cash equivalents, and
short-term investments, net of short-term borrowings, increased to $1,172
million at June 28, 1996, from $491 million at September 29, 1995. The
Company's financial position with respect to cash, cash equivalents, and short-
term investments increased to $1,359 million at June 28, 1996, from $952
million at September 29, 1995. The Company's cash and cash equivalent
balance includes $173 million pledged as collateral to support letters of
credit primarily associated with the Company's purchase commitments under the
terms of the sale of the Company's Fountain, Colorado manufacturing facility to
SCI Systems, Inc., and at September 29, 1995 includes $90 million pledged as
collateral to support short-term borrowings.
Cash generated by operations during the first nine months of 1996 totaled $112
million. Cash generated by operations was primarily the result of decreases in
accounts receivable and inventories, partially offset by a decrease in accounts
payable. Cash generated during the first nine months of 1996 from the sale of
certain equity investments and the sale of the Fountain manufacturing facility
to SCI Systems, Inc. totaled $120 million.
Net cash used for the purchase of property, plant, and equipment totaled $55
million in the first nine months of 1996, and consisted primarily of increases
in manufacturing machinery and equipment. The Company expects that capital
expenditures in 1996 will remain below 1995 levels.
Short-term borrowings at June 28, 1996, were approximately $274 million lower
than at September 29, 1995. During the third quarter, an outstanding loan to
Apple Computer B.V., a subsidiary of the Company, in the amount of $200
million was repaid in full. At June 28, 1996, Apple Japan, Inc., a subsidiary
of the Company, held $187 million of short-term borrowings from several banks,
with maturity dates ranging from September 1996 to December 1996. The majority
of these loans are guaranteed by the Company.
The Company's balance of long-term debt increased during the first nine months
of 1996 due to the issuance of $661 million aggregate principal amount of 6%
unsecured convertible subordinated notes to certain qualified parties in a
private placement. These notes were sold at 100% of par. These notes pay
interest semi-annually and mature on June 1, 2001. For more information
regarding the Company's unsecured convertible subordinated notes, refer to Note
2 of the Notes to Consolidated Financial Statements (Unaudited) in Part I, Item
I of this Quarterly Report on Form 10-Q, which information is hereby
incorporated by reference. The remainder of long-term borrowings consists of
$300 million aggregate principal amount of 6.5% unsecured notes issued under an
omnibus shelf registration statement filed with the Securities and Exchange
Commission in 1994. The notes were sold at 99.925% of par, for an effective
yield to maturity of 6.51%. The notes pay interest semi-annually and mature on
February 15, 2004.
The Internal Revenue Service has proposed federal income tax deficiencies for
the years 1984 through 1991, and the Company has made certain prepayments
thereon. The Company contested the proposed deficiencies for the years 1984
through 1988, and most of the issues in dispute for these years have been
resolved. On June 29, 1995, the IRS issued a notice of deficiency proposing
increases to the amount of the Company's federal income taxes for the years
1989 through 1991. The Company has filed a petition with the United States Tax
Court to contest these alleged tax deficiencies. Management believes that
adequate provision has been made for any adjustments that may result from these
tax examinations.
As noted on page 13 under the subheading "Interest and other income (expense),
net", the Company's cost of funds has increased as a result of the downgrading
from January 1996 through May 1996 of its short-term debt to NP and C by
Moody's Investor Services and Standard and Poor's Rating Agency, respectively,
and of its long-term debt to B1 and B+ by Moody's Investor Services and
Standard and Poor's Rating Agency, respectively. In addition, the Company may
be required to pledge additional collateral with respect to certain of its
borrowings and letters of credit and to agree to more stringent covenants than
in the past. The Company believes that its balances of cash and cash
equivalents, together with continued short-term borrowings and the sale of
certain assets and other investments, will be sufficient to meet its operating
cash requirements, including the impact of planned restructuring actions, on a
short- and long-term basis. No assurance can be given that short-term
borrowings can be continued, or that any additional financing that may be
required if the restructuring plan takes longer to implement than anticipated
or is not successful can be obtained. If the Company is unable to obtain such
financing, its liquidity, results of operations and financial condition will be
materially adversely affected.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 1 of Part II of the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 29, 1996 for a discussion of
certain purported shareholder class action suits filed in January 1996 and
March 1996. In August 1996, the Company's demurrer to the complaint in the
action styled Abraham and Evelyn Kostick Trust v. Peter Crisp, et al. was
sustained on a variety of grounds. The court granted the plaintiffs sixty
days to amend their complaint. In June 1996, a purported class action
complaint naming the Company and certain current and former officers, directors
and employees was filed in the California Superior Court for Alameda County,
styled as LS Men's Clothing Defined Benefit Pension Plan v. Spindler, et al.,
No. CV 767971. The complaint, which seeks damages, generally alleges that the
defendants misrepresented or omitted material facts about the Company's
operations and financial results which plaintiff contends artificially inflated
the Company's stock price. None of the defendants has yet responded to the
complaint.
The Company has been named as a defendant in numerous lawsuits (fewer than 100)
in each of which the complaint alleges that the plaintiff incurred so-called
"repetitive stress injuries" to the upper extremities as a result of using
keyboards and/or mouse input devices sold by the Company. All of these cases
are in various stages of pre-trial activity. These suits are similar to those
filed against other major suppliers of personal computers. Ultimate resolution
of the litigation against the Company may depend on progress in resolving this
type of litigation in the industry overall.
In August 1995, the Company was named, along with forty-one other entities,
including computer manufacturers and computer monitor vendors, in a putative
nationwide class action filed in the California Superior Court for Orange
County, styled Keith Long, et al. v. AAmazing Technologies Corp., et al. The
complaint alleges that each of the defendants engaged in false or misleading
advertising with respect to the size of computer monitor screens. Also in
August 1995, the Company was named as the sole defendant in a purported class
action alleging similar claims filed in the New Jersey Superior Court for
Camden County, entitled Mahendri Shah v. Apple Computer, Inc. Subsequently,
in November 1995, the Company, along with 26 other entities, was named in a
purported class action alleging similar claims filed in the New Jersey Superior
Court for Essex County, entitled Maizes & Maizes v. Apple Computer, Inc., et
al. Similar punative class actions have been filed in other California
counties in which the Company was not named as a defendant. The complaints in
all of these cases seek restitution in the form of refunds or product exchange,
damages, punitive damages and attorneys fees. In December 1995, the California
Judicial Council ordered all of the California actions, including Long,
coordinated for purposes of pre-trial proceedings and trial before a single
judge, the Honorable William Cahill, sitting in the County of San Francisco.
All of the California actions were subsequently coordinated under the name In
re Computer Monitor Litigation and a master consolidated complaint filed
superseding all of the individual complaints in those actions. On July 3,
1996, Judge Cahill ordered all of the California cases dismissed without leave
to amend as to plaintiffs residing in California on the ground that a
stipulated judgment entered in September 1995 in a prior action brought by the
California Attorney General alleging the same cause of action was res judicata
as to the plaintiffs in the consolidated California class action suits. Both
the New Jersey cases and the consolidated California cases are at a preliminary
stage, with no discovery having taken place.
The Company has various claims, lawsuits, disputes with third parties,
investigations and pending actions involving allegations of false or misleading
advertising, product defects, discrimination, infringement of intellectual
property rights, and breach of contract and other matters against the Company
and its subsidiaries incident to the operation of its business. The liability,
if any, associated with these matters was not determinable as of the date of
this filing.
The Company believes the resolution of the actions cited above will not have a
material adverse effect on its financial condition as reported in the
accompanying financial statements. However, depending on the amount and timing
of any unfavorable resolution of these lawsuits, it is possible that the
Company's future results of operations or cash flows could be materially
affected in a particular period.
21
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
10.A.32 Employment Agreement dated June 13, 1996, between
Registrant and Robert M. Calderoni.
10.A.33 Employment Agreement dated June 25, 1996, between
Registrant and Ellen M. Hancock.
10.A.34 Retention Agreement dated June 25, 1996, between
Registrant and Ellen M. Hancock.
10.A.35 Retention Agreement dated June 27, 1996, between
Registrant and George M. Scalise.
10.A.36 Airplane Use Agreement dated June 27, 1996, among
Registrant, Gilbert F. Amelio and Aero Ventures.
10.A.37 Letter Agreement dated May 1, 1996, between
Registrant and Jeanne Seeley.
10.A.38 Separation Agreement effective March 28, 1996, between
Registrant and Michael H. Spindler.
10.A.39 Letter Agreement dated June 3, 1996, between Registrant
and James J. Buckley.
10.B.16 Fountain Manufacturing Agreement dated May 31, 1996
between Registrant and SCI Systems, Inc.
11 Computation of per share earnings
27 Financial Data Schedule
b) Reports on Form 8-K
A Current Report on Form 8-K dated June 14, 1996 was filed by
Registrant with the Securities and Exchange Commission to report under Item 5
thereof the press releases issued to the public on June 3, 1996, June 4, 1996
and June 10, 1996, respectively, and the Registant's private placement of
convertible subordinated debentures described therein.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLE COMPUTER, INC.
(Registrant)
DATE: August 12, 1996 BY /s/ Fred D. Anderson
Fred D. Anderson
Executive Vice President and
Chief Financial Officer
DATE: August 12, 1996 BY /s/ Jeanne Seeley
Jeanne Seeley
Vice President, Finance and
Corporate Controller
23
APPLE COMPUTER, INC.
INDEX TO EXHIBITS
Exhibit Index Description Page Number
10.A.32 Employment Agreement dated June 13,
1996, between Registrant and Robert M.
Calderoni. 25
10.A.33 Employment Agreement dated June 25,
1996, between Registrant and Ellen M.
Hancock. 31
10.A.34 Retention Agreement dated June 25, 1996,
between Registrant and Ellen M. Hancock. 36
10.A.35 Retention Agreement dated June 27, 1996,
between Registrant and George M. Scalise. 49
10.A.36 Airplane Use Agreement dated June 27, 1996,
among Registrant, Gilbert F. Amelio and Aero
Ventures. 65
10.A.37 Letter Agreement dated May 1, 1996, between
Registrant and Jeanne Seeley. 70
10.A.38 Separation Agreement effective March 28,
1996, between Registrant and Michael H.
Spindler. 72
10.A.39 Letter Agreement dated June 3, 1996, between
Registrant and James J. Buckley. 83
10.B.16 Fountain Manufacturing Agreement dated May
31, 1996 between Registrant and SCI Systems,
Inc. 85
11 Computation of per share earnings 117
27 Financial Data Schedule 118
24
Dates Referenced Herein and Documents Incorporated by Reference
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