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Apple Inc – ‘10-Q’ for 3/28/97

As of:  Monday, 5/12/97   ·   For:  3/28/97   ·   Accession #:  320193-97-11   ·   File #:  0-10030

Previous ‘10-Q’:  ‘10-Q’ on 2/10/97 for 12/27/96   ·   Next:  ‘10-Q’ on 8/11/97 for 6/27/97   ·   Latest:  ‘10-Q’ on 2/2/24 for 12/30/23

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  As Of                Filer                Filing    For·On·As Docs:Size

 5/12/97  Apple Inc                         10-Q        3/28/97    6:217K

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                      30    150K 
 2: EX-3        Articles of Incorporation/Organization or By-Laws     18     91K 
 3: EX-10       Material Contract                                      2±     8K 
 4: EX-10       Material Contract                                      9     39K 
 5: EX-10       Material Contract                                     12     59K 
 6: EX-27     ƒ Art. 5 FDS for Fy97 Form 10-K                          1      6K 


10-Q   —   Quarterly Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Financial Statements
9Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
27Item 1. Legal Proceedings
28Item 6. Exhibits and Reports on Form 8-K
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________________________________________________________________ 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 March 28, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ___________ Commission file number 0-10030 APPLE COMPUTER, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 94-2404110 [State or other jurisdiction [I.R.S. Employer Identification No.] of incorporation or organization] 1 Infinite Loop Cupertino California 95014 [Address of principal executive offices] [Zip Code] Registrant's telephone number, including area code: (408) 996-1010 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 126,354,086 shares of Common Stock Issued and Outstanding as of May 2, 1997
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PART I. FINANCIAL INFORMATION Item 1. Financial Statements APPLE COMPUTER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in millions, except per share amounts) APPLE COMPUTER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in millions, except per share amounts) [Download Table] THREE MONTHS ENDED SIX MONTHS ENDED March 28, March 29, March 28, March 29, 1997 1996 1997 1996 Net sales $1,601 $ 2,185 $3,730 $ 5,333 Costs and expenses: Cost of sales 1,298 2,606 3,030 5,279 Research and development 141 150 290 303 Selling, general and administrative 348 404 720 845 In-process research and development 375 - 375 - Restructuring costs 155 207 155 207 2,317 3,367 4,570 6,634 Operating loss (716) (1,182) (840) (1,301) Interest and other income (expense),net 8 7 12 17 Loss before benefit from income taxes (708) (1,175) (828) (1,284) Benefit from income taxes - (435) - (475) Net loss $(708) $(740) $(828) $ (809) Loss per common share $(5.64) $(5.99) $(6.62) $(6.55) Cash dividends paid per common share $ -- $ -- $ -- $ 0.12 Common shares used in the calculations of loss per share (in thousands) 125,609 123,659 125,071 123,326
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1 APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS ASSETS (In millions) [Download Table] March 28, September 27 1997 1996 (Unaudited) Current assets: Cash and cash equivalents $1,273 $1,552 Short-term investments 186 193 Accounts receivable, net of allowance for doubtful accounts of $96 ($91 at September 27, 1996) 1,149 1,496 Inventories: Purchased parts 220 213 Work in process 19 43 Finished goods 270 406 509 662 Deferred tax assets 303 342 Other current assets 222 270 Total current assets 3,642 4,515 Property, plant, and equipment: Land and buildings 461 480 Machinery and equipment 529 544 Office furniture and equipment 124 136 Leasehold improvements 181 188 1,295 1,348 Accumulated depreciation and amortization (739) (750) Net property, plant, and equipment 556 598 Other assets 289 251 $4,487 $ 5,364
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2 APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in millions) [Download Table] March 28, September 27 1997 1996 (Unaudited) Current liabilities: Notes payable to banks $ 133 $ 186 Accounts payable 840 791 Accrued compensation and employee benefits 137 120 Accrued marketing and distribution 277 257 Accrued warranty and related 143 181 Accrued restructuring costs 227 117 Other current liabilities 254 351 Total current liabilities 2,011 2,003 Long-term debt 952 949 Deferred tax liabilities 282 354 Shareholders' equity: Common stock, no par value; 320,000,000 shares authorized; 126,424,977 shares issued and outstanding at March 28, 1997 (124,496,972 shares at September 27, 1996) 472 439 Retained earnings 806 1,634 Other (36) (15) Total shareholders' equity 1,242 2,058 $4,487 $ 5,364
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4 APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) [Download Table] SIX MONTHS ENDED March 28, 1997 March 29, 1996 Cash and cash equivalents, beginning of the period $1,552 $ 756 Operating: Net loss (828) (809) Adjustments to reconcile net loss to cash generated by operating activities: Depreciation and amortization 55 88 Net book value of property, plant, and equipment retirements 32 2 In-process research and development 375 --- Changes in assets and liabilities, net of effect of the acquisition of NeXT: Accounts receivable 356 565 Inventories 153 309 Deferred tax assets 39 (228) Other current assets 49 (59) Accounts payable 48 (348) Accrued restructuring costs 110 181 Other current liabilities (123) 224 Deferred tax liabilities (72) (100) Cash generated by (used for) operating activities 194 (175) Investing: Purchases of short-term investments (671) (244) Proceeds from sale of short- term investments 678 348 Purchases of property, plant and equipment (36) (42) Cash used to acquire NeXT (383) --- Other (17) (42) Cash generated by (used for) investing activities (429) 20 Financing: Decrease in notes payable to banks (53) (109) Increase in long-term borrowings 1 -- Increases in common stock, net of related tax benefits and effect of the acquisition of NeXT 8 22 Cash dividends -- (14) Cash used for financing activities (44) (101) Total cash used (279) (256) Cash and cash equivalents, end of the period $1,273 $500 4
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APPLE COMPUTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Interim information is unaudited; however, in the opinion of the Company's management, all adjustments necessary for a fair statement of interim results have been included. All adjustments are of a normal recurring nature unless specified in a separate note included in these Notes to Consolidated Financial Statements. The results for interim periods are not necessarily indicative of results to be expected for the entire year. These financial statements and notes should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto for the fiscal year ended September 27, 1996, included in its Annual Report on Form 10-K for the year ended September 27, 1996 (the 1996 Form 10-K). 2. In the second quarter of 1996, the Company announced and began to implement a restructuring plan aimed at reducing costs and restoring profitability to the Company's operations. The restructuring plan was necessitated by decreased demand for Company products and the Company's adoption of a new strategic direction. These actions resulted in a net charge of $179 million after subsequent adjustments recorded in the fourth quarter of 1996. In the second quarter of 1997, the Company announced and began to implement supplemental restructuring actions to meet the foregoing objectives of the plan. The Company recognized a $155 million charge in the second quarter for the estimated incremental costs of those actions. The restructuring actions consist of terminating approximately 3,500 full-time employees, approximately 2,100 of whom have been terminated from the second quarter of 1996 through March 28, 1997, excluding employees who were hired by SCI Systems, Inc. and MCI Systemhouse, the purchasers of the Company's Fountain, Colorado manufacturing facility and the Napa, California data center facility, respectively; canceling or vacating certain facility leases as a result of those employee terminations; writing down certain land, buildings and equipment to be sold as a result of downsizing operations and outsourcing various operational functions; and canceling contracts for projects and technologies that are not central to the Company's core business strategy. The restructuring actions under the plan have resulted in cash expenditures of $79 million and noncash asset write-downs of $28 million from the second quarter of 1996 through March 28, 1997. The Company expects that the remaining $227 million accrued balance at March 28, 1997 will result in cash expenditures of approximately $170 million over the next twelve months and $11 million thereafter. The Company expects that most of the contemplated restructuring actions related to the plan will be completed within the next six months and will be financed through current working capital and continued short-term borrowings. 5
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The following table depicts the restructuring activity from September 27, 1996 to March 28, 1997: (In millions) [Download Table] Category Balance at Balance at September 27, Net March 28, 1996 Additions Spending 1997 Payments to employees involuntarily terminated (C) $33 $109 $12 $130 Payments on canceled or vacated facility leases (C) 15 16 5 26 Write-down of operating assets to be sold (N) 47 20 21 46 Payments on canceled contracts (C) 22 10 7 25 $117 $155 $45 $227 C: Cash; N: Noncash 3. On February 4, 1997, the Company acquired all of the outstanding shares of NeXT Software, Inc. ("NeXT"). NeXT, headquartered in Redwood City, California, had developed, marketed and supported software that enables customers to easily and quickly implement business applications on the Internet/World Wide Web, intranets and enterprise- wide client/server networks. The total purchase price was $424 million and was comprised of cash payments of $319 million and the issuance of 1.5 million shares of the Company's common stock to the NeXT shareholders valued at approximately $25 million according to the terms of the purchase agreement; the issuance of approximately 1.8 million options to purchase the Company's common stock to the NeXT optionholders valued at approximately $16 million based on the difference between the exercise price of the options and the market value of the Company's stock on the date the options were granted; cash payments of $56 million to the NeXT debtholders; and cash payments of $8 million for closing and related costs. The acquisition was accounted for as a purchase and, accordingly, the operating results pertaining to NeXT subsequent to the date of acquisition have been included in the Company's consolidated operating results. The excess purchase price over the fair value of the net tangible assets acquired was $422 million of which $375 million was allocated to purchased in-process research and development and $47 million was allocated to goodwill and other intangible assets. The purchased in-process research and development was charged to operations upon acquisition, and the goodwill and other intangible assets are being amortized on a straight-line basis over 2 to 7 years. The purchase price allocation is based on preliminary estimates of the fair value of the acquired net assets and in-process research and development and may be subject to adjustment as management completes its evaluation of the technology acquired and additional information becomes available during 1997. The following unaudited proforma summary combines the consolidated results of operations of the Company and NeXT as if the acquisition had occurred at the beginning of the three and six months ended March 28, 1997 and March 29, 1996, after giving effect to certain adjustments, including in-process research and development, amortization of intangible assets, lower interest income as a result of lower cash investment balances, and lower interest expense as a result of the settlement of the NeXT debt, and related income tax effects. The proforma summary does not necessarily reflect the results of operations as they would have been had the Company and NeXT been combined as of the beginning of such periods. 6
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Proforma Results of Operations (dollars in millions) Second Quarter Six Months Ended 1997 1996 March 28, March 29, 1997 1996 [S] [C] [C] [C] [C] Net sales $1,603 $2,194 $3,747 $5,352 Net loss $(714) $(1,125) $(843) $(1,204) Loss per common share $(5.66) $(8.99) $(6.69) $(9.64) 4. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). Under the provisions of FAS 128, primary earnings per share will be replaced with basic earnings per share, and fully diluted earnings per share will be replaced with diluted earnings per share for companies with potentially dilutive securities such as outstanding options and convertible debt. FAS 128 is effective for annual and interim periods ending after December 15, 1997 and will require restatement of all comparative per share amounts. The basic loss per share will be no different than the primary loss per share as presented in the accompanying consolidated statements of operations as neither consider outstanding options or convertible debt. If and when the Company becomes profitable, it will be required to present both basic and diluted earnings per share. Basic earnings per share, which does not consider potentially dilutive securities, will be greater than the replaced primary earnings per share which did consider those securities. In addition, diluted earnings per share will not differ materially from the replaced fully diluted earnings per share. 5. The information set forth in Item 1 of Part II hereof is hereby incorporated by reference. 7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. All information is based on the Company's fiscal calendar.(Tabular information: Dollars in millions, except per share amounts) [Download Table] Results of Operations Second Quarter 1997 1996 Change Net sales $ 1,601 $ 2,185 (27%) Gross margin $ 303 $ (421) NM Percentage of net sales 18.9% (19.3%) Research and development $ 141 $ 150 (6%) Percentage of net sales 8.8% 6.9% Selling, general and administrative $ 348 $ 404 (14%) Percentage of net sales 21.7% 18.5% In-Process research and development $ 375 $ --- NM Percentage of net sales 23.4% --- Restructuring costs $ 155 $ 207 NM Percentage of net sales 9.7% 9.5% Interest and other income (expense), net $ 8 $ 7 14% Net loss $ (708) $ (740) (4%) Loss per share $ (5.64) $ (5.99) (6%) Six Months Ended March 28, March 29, 1997 1996 Change Net sales $ 3,730 $ 5,333 (30%) Gross margin $ 700 $ 54 NM Percentage of net sales 18.8% 1.0% Research and development $ 290 $ 303 (4%) Percentage of net sales 7.8% 5.7% Selling, general and administrative $ 720 $ 845 (15%) Percentage of net sales 19.3% 15.8% In-Process research and development $ 375 $ --- NM Percentage of net sales 10.1% --- Restructuring costs $ 155 $ 207 NM Percentage of net sales 4.2% 3.9% Interest and other income (expense), net $ 12 $ 17 (29%) Net loss $ (828) $ (809) (2%) Loss per share $ (6.62) $ (6.55) (1%) Second First Quarter Quarter 1997 1996 Change Net sales $ 1,601 $ 2,129 (25%) Gross margin $ 303 $ 397 (24%) Percentage of net sales 18.9% 18.6% Research and development $ 141 $ 149 (5%) Percentage of net sales 8.8% 7.0% Selling, general and administrative $ 348 $ 372 (6%) Percentage of net sales 21.7% 17.5% In-Process research and development $ 375 $ --- NM Percentage of net sales 23.4 --- Restructuring costs $ 155 $ --- NM Percentage of net sales 9.7% --- Interest and other income (expense), net $ 8 $ 4 100% Net loss $ (708) $ (120) (490%) Loss per share $ (5.64) $ (0.96) (488%) NM: Not meaningful. 8
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Overview During the second quarter of 1997, the Company continued to experience declines in net sales, units shipped and share of the personal computer market. Faced with this continued decline in demand and the resulting continued operating losses, coupled with intense price competition throughout the industry, the Company announced and began to effect supplemental restructuring actions, including significant additional headcount reductions, in order to reduce costs and return the Company to sustainable profitability. In addition, the Company completed its acquisition of NeXT. The Company plans to develop and market a new operating system ("OS") based on its Mac OS and NeXT software technologies. Net Sales Q2 97 compared with Q2 96 Net sales decreased 27% in the second quarter of 1997 compared with the same period of 1996. Total Macintosh computer unit sales and peripheral unit sales decreased 33% and 44%, respectively, in the second quarter of 1997, compared with the same period of 1996, as a result of a decline in worldwide demand for most product families, especially the Performa(R) and Power Macintosh(R) lines of consumer-oriented products, which the Company believes was due principally to customer concerns regarding the Company's strategic direction, financial condition, future prospects and the viability of the Macintosh platform, and to competitive pressures in the marketplace. In addition, Macintosh unit sales were negatively affected as a result of the Company's inability to fulfill all purchase orders of Power Macintosh products due to the unavailability of sufficient quantities of certain components and product transition constraints. The average aggregate revenue per Macintosh unit increased 9% in the second quarter of 1997 compared with the same period of 1996, as a result of a shift in mix toward the Company's newer and higher priced PowerBook(R) and Power Macintosh products, partially offset by continued pricing actions, including rebates, across the Performa and other product lines in an effort to stimulate demand. The average aggregate revenue per peripheral product increased 22% in the second quarter of 1997 compared with the same period of 1996, as a result of a shift in mix toward the Company's newer and higher priced products, partially offset by continued pricing actions, including rebates, across most product lines in an effort to stimulate demand. The average aggregate revenue per Macintosh unit and per peripheral unit will remain under significant downward pressure due to a variety of factors, including industrywide pricing pressures, increased competition, and the need to stimulate demand for the Company's products. International net sales represented 49% of total net sales in the second quarter of 1997 compared with 59% in the same period of 1996. International net sales declined 39% in the second quarter of 1997 compared with the same period of 1996. Net sales in both European markets and Japan decreased during the second quarter of 1997 compared with the same period in 1996, as a result of decreases in Macintosh and peripheral unit sales and the average aggregate revenue per Macintosh unit, partially offset by an increase in the average aggregate revenue per peripheral unit. Domestic net sales declined 9% in the second quarter of 1997, over the comparable period of 1996, due to decreases in unit sales of Macintosh computers and peripheral products, partially offset by increases in the average aggregate revenue per Macintosh and peripheral unit. According to industry sources, in the second quarter of 1997 compared with the comparable period of 1996, the Company's approximate share of the worldwide and U.S. personal computer markets declined to 3.1% from 5.8% and to 4.0% from 7.3%, respectively. In addition, the Company believes that its licensees' share of the worldwide personal computer market increased to approximately 0.3% from approximately 0.1%. 9
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Six Months Ended March 28, 1997 compared with Six Months Ended March 29, 1996 Net sales decreased 30% in the first six months of 1997 compared with the same period of 1996. Total Macintosh computer unit sales and peripheral unit sales decreased 30% and 34%, respectively, in the first six months of 1997, compared with the same period of 1996, as a result of a decline in worldwide demand for most product families, especially the Performa line of consumer-oriented products, which the Company believes was due principally to customer concerns regarding the Company's strategic direction, financial condition, future prospects and the viability of the Macintosh platform, and to competitive pressures in the marketplace. In addition, Macintosh unit sales were negatively affected as a result of the Company's inability to fulfill all purchase orders of Power Macintosh products due to the unavailability of sufficient quantities of certain components and product transition constraints. The average aggregate revenue per Macintosh unit decreased 3% in the first six months of 1997 compared with the same period of 1996, primarily due to continued pricing actions, including rebates, across most product lines in an effort to stimulate demand, partially offset by a shift in mix toward higher priced PowerBook and Power Macintosh products. The average aggregate revenue per peripheral product increased 15% in the first six months of 1997 compared with the same period of 1996, as a result of a shift in mix toward the Company's newer and higher priced products, partially offset by continued pricing actions, including rebates, across most product lines in an effort to stimulate demand. International net sales represented 53% of total net sales in the first six months of 1997 compared with 54% in the same period of 1996. International net sales declined 31% in the first six months of 1997 compared with the same period of 1996. Net sales in European markets and Japan decreased during the first six months of 1997 compared with the same period in 1996, as a result of decreases in Macintosh and peripheral unit sales and the average aggregate revenue per Macintosh unit, partially offset by an increase in the average aggregate revenue per peripheral unit. Domestic net sales declined 29% in the first six months of 1997, over the comparable period of 1996, due to decreases in unit sales of Macintosh computers and peripheral products and a slight decrease in the average aggregate revenue per Macintosh unit, slightly offset by an increase in the average aggregate revenue per peripheral unit. Q2 97 compared with Q1 97 Net sales decreased 25% in the second quarter of 1997 compared with the first quarter of 1997. Total Macintosh computer unit sales decreased 35% in the second quarter of 1997 compared with the prior quarter primarily as a result of a decline in unit sales of Performa and Power Macintosh products, which the Company believes was due principally to customer concerns regarding the Company's strategic direction, financial condition, future prospects and the viability of the Macintosh platform, and to competitive pressures in the marketplace, as well as the seasonal decline in unit sales and a reduction in channel inventory levels from the first quarter to the second quarter, partially offset by an increase in unit sales of PowerBook products as a result of new product introductions which satisfied pent-up demand. Power Macintosh unit sales were negatively affected as a result of the Company's inability to fulfill all purchase orders due to the unavailability of sufficient quantities of certain components and product transition constraints. Unit sales of peripheral products decreased 38% in the second quarter of 1997 compared with the first quarter of 1997. The average aggregate revenue per Macintosh and peripheral unit increased 14% and 11%, respectively, in the second quarter of 1997 compared with the first quarter of 1997, primarily due to a shift in product mix toward the Company's newer and higher priced products. 10
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International net sales represented 49% of total net sales in the second quarter of 1997, compared with 56% in the first quarter of 1997. International net sales decreased 34% in the second quarter compared with the first quarter of 1997. Net sales in European markets and Japan decreased during the second quarter compared with the first quarter of 1997, as a result of decreases in Macintosh and peripheral unit sales and average aggregate revenue per Macintosh unit, partially offset by an increase in the average aggregate revenue per peripheral unit. Domestic net sales declined 13% in the second quarter of 1997 compared with the prior quarter, due to decreases in Macintosh and peripheral unit sales, partially offset by increases in the average aggregate revenue per Macintosh and peripheral unit. According to industry sources, in the second quarter of 1997 compared with the first quarter of 1997, the Company's share of the worldwide and U.S. personal computer markets declined to 3.1% from 4.3%, and to 4.0% from 5.2%, respectively. In addition, the Company believes that its licensees' share of the worldwide personal computer market decreased to approximately 0.3% from approximately 0.5%. In general, the Company's resellers purchase products on an as-needed basis. Resellers frequently change delivery schedules and order rates depending on changing market conditions. Unfilled orders ("backlog") can be, and often are, canceled at will. The Company attempts to fill orders on the requested delivery schedules. The Company's backlog decreased to approximately $409 million at May 2, 1997, from approximately $454 million at January 31, 1997, primarily due to a decrease in backlog of PowerBook product as a result of satisfying pent-up demand, partially offset by an increase in backlog of Power Macintosh product due to the Company's inability to fulfill all purchase orders, as discussed above. 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 once dealers and customers believe they can obtain sufficient supply. Because of the foregoing, as well as other factors affecting the Company's backlog, backlog should not be considered a reliable indicator of the Company's ability to achieve any particular level of revenue or financial performance. The Company believes that net sales will be below the level of the prior year's comparable periods through at least the fourth quarter of 1997, if not longer. Gross Margin Gross margin represents the difference between the Company's net sales and its cost of goods sold. The amount of revenue generated by the sale of products is influenced principally by the price set by the Company for its products relative to competitive products. The cost of goods sold is based primarily on the cost of components and, to a lesser extent, direct labor costs. The type and cost of components included in particular configurations of the Company's products (such as memory and disk drives) are often directly related to the need to market products in configurations competitive with other manufacturers. Competition in the personal computer industry is intense and, in the short term, frequent changes in pricing and product configuration are often necessary in order to remain competitive. Accordingly, gross margin as a percentage of net sales can be significantly influenced in the short term by actions undertaken by the Company in response to industrywide competitive pressures. 11
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Gross margin increased as a percentage of sales in the second quarter and the first six months of 1997, respectively, when compared with the corresponding periods of 1996, primarily as a result of a $616 million charge in the second quarter of 1996 that related principally to the write-down of certain inventory, as well as to 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 a $60 million charge in the second quarter of 1996 to reflect the estimated cost to correct certain quality problems in certain entry level, Performa and PowerBook products. In addition, gross margins in the second quarter of 1996, and to a lesser degree the first quarter of that year, were adversely affected by aggressive pricing actions in Japan in response to extreme competitive actions by other companies, as well as pricing actions in the U.S. and Europe across all product lines in order to stimulate demand. Gross margin remained relatively flat as a percentage of sales in the second quarter, compared with the first quarter of 1997, primarily due to a shift in mix toward higher priced and higher margin PowerBook products, offset by continued pricing actions, including rebates, across the Performa and other product lines in an effort to stimulate demand. The gross margin levels in the second quarter of 1997 compared with the first quarter of 1997 and the second quarter of 1996, and in the first 6 months of 1997 compared with the corresponding period of 1996, were also adversely affected by a stronger U.S. dollar relative to certain foreign currencies, offset by hedging gains. The Company's operating strategy and pricing take into account changes in exchange rates over time; however, the Company's results of operations can be significantly affected in the short term by fluctuations in foreign currency exchange rates. There can be no assurance that the Company will be able to sustain the gross margin levels achieved in the second quarter and in the first six months of 1997. Gross margins will remain under significant downward pressure due to a variety of factors, including continued industrywide pricing pressures around the world, increased competition, and compressed product life cycles. In response to those downward pressures, the Company expects it will continue to take pricing actions with respect to its products. Gross margins could also be affected by the Company's ability to effectively manage quality problems and warranty costs, and to stimulate demand for certain of its products. [Download Table] Research and Development Second Quarter 1997 1996 Change Research and development $ 141 $ 150 (6%) Percentage of net sales 8.8% 6.9% Six Months Ended March 28, March 29, 1997 1996 Change Research and development $ 290 $ 303 (4%) Percentage of net sales 7.8% 5.7% Second First Quarter Quarter 1997 1997 Change Research and development $ 141 $ 149 (5%) Percentage of net sales 8.8% 7.0% 12
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Research and development expenditures decreased slightly in amount in the second quarter of 1997 compared with the first quarter of 1997 and the second quarter of 1996, and during the first six months of 1997 compared with the same period of 1996, primarily due to reduced expenditures as a result of the Company initiating certain restructuring actions late in the second quarter of 1997. The increases as a percentage of net sales resulted from decreases in the levels of net sales. 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 that are central to the Company's core business strategy. The Company believes its research and development expenditures will significantly decrease in the third and fourth quarters of 1997 compared with the same periods of the prior year and compared with the second quarter of 1997, as the Company completes and more fully realizes the cost reduction benefits of its restructuring plan. For additional information regarding the restructuring plan, refer to Note 2 of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future Results and Financial Condition as well as Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. [Download Table] In-Process Research and Development Second Quarter 1997 1996 Change In-Process research and development $ 375 $ --- NM Percentage of net sales 23.4% --- Six Months Ended March 28, March 29, 1997 1996 Change In-Process research and development $ 375 $ --- NM Percentage of net sales 10.1% --- Second First Quarter Quarter 1997 1997 Change In-Process research and development $ 375 $ --- NM Percentage of net sales 23.4% --- NM: Not meaningful. As a result of the NeXT acquisition, the Company took a substantial charge for in-process research and development during the second quarter of 1997. For additional information regarding the acquisition of NeXT, refer to Note 3 of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future Results and Financial Condition as well as Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. 13
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[Download Table] Selling, General and Administrative Second Quarter 1997 1996 Change Selling, general and administrative $ 348 $ 404 (14%) Percentage of net sales 21.7% 18.5% Six Months Ended March 28, March 29, 1997 1996 Change Selling, general and administrative $ 720 $ 845 (15%) Percentage of net sales 19.3% 15.8% Second First Quarter Quarter 1997 1997 Change Selling, general and administrative $ 348 $ 372 (6%) Percentage of net sales 21.7% 17.5% Selling, general and administrative expenses decreased in amount in the second quarter of 1997 compared with the first quarter of 1997 and the second quarter of 1996, and during the first six months of 1997 compared with the same period of 1996, primarily due to reduced expenditures as a result of actions taken under the Company's restructuring plan. In addition, selling, general and administrative expenses decreased in amount in the second quarter of 1997 compared with the first quarter due to the higher level of advertising and marketing expenditures incurred during the first quarter for the holiday buying season. The increases as a percentage of net sales resulted from decreases in the levels of net sales. The Company believes its selling, general and administrative expenditures will significantly decrease in the third and fourth quarters of 1997 compared with the same quarters of the prior year and compared with the second quarter of 1997, as the Company completes and more fully realizes the cost reduction benefits of its restructuring plan, slightly offset by the amortization expense on the intangible assets the Company recognized as a result of the acquisition of NeXT. For additional information regarding the Company's restructuring actions and the acquisition of NeXT, refer to Notes 2 and 3, respectively, of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future Results and Financial Condition as well as Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. 14
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[Download Table] Restructuring Costs Second Quarter 1997 1996 Change Restructuring costs $ 155 $ 207 NM Percentage of net sales 9.7% 9.5% Six Months Ended March 28, March 29, 1997 1996 Change Restructuring costs $ 155 $ 207 NM Percentage of net sales 4.2% 3.9% Second First Quarter Quarter 1997 1997 Change Restructuring costs $ 155 $ --- NM Percentage of net sales 9.7% --- NM: Not meaningful. For information regarding the Company's restructuring actions initiated in the second quarters of 1997 and 1996, refer to Note 2 of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Factors That May Affect Future Results and Financial Condition as well as Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. [Download Table] Interest and Other Income (Expense), Net Second Quarter 1997 1996 Change Interest and other income(expense), net $ 8 $ 7 14% Six Months Ended March 28, March 29, 1997 1996 Change Interest and other income(expense), net $ 12 $ 17 (29%) Second First Quarter Quarter 1997 1997 Change Interest and other income(expense), net $ 8 $ 4 100% Interest and other income (expense), net, increased slightly in the second quarter of 1997 compared with the same period of 1996, primarily as a result of higher interest income, partially offset by lower net gains on foreign exchange instruments. Interest and other income (expense), net, increased in the second quarter of 1997 compared with the first quarter of 1997, primarily as a result of higher net gains on foreign exchange instruments. Interest and other income (expense), net, decreased in the first six months of 1997 compared with the same period of 1996, primarily due to lower foreign currency gains, partially offset by greater interest income. 15
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The Company expects interest income to decrease in the third and fourth quarters of 1997 compared with the immediate prior quarters, due to lower cash balances as a result of cash used to acquire NeXT, fund the restructuring actions over primarily the next two quarters, and fund operations over at least the next quarter. In the second quarter of 1997, the Company's senior and subordinated long-term debt were downgraded to B and CCC+, respectively, by Standard and Poor's Rating Agency and to B3 and Caa, respectively, by Moody's Investor Services. These actions could increase the Company's cost of funds in future periods. [Download Table] Income Tax Provision (Benefit) Second Quarter 1997 1996 Change Provision (benefit) for income taxes -- $ (435) NM Effective tax rate -- 37% Six Months Ended March 28, March 29, 1997 1996 Change Provision (benefit) for income taxes -- $ (475) NM Effective tax rate -- 37% Second First Quarter Quarter 1997 1997 Change Provision (benefit) for income taxes -- -- NM Effective tax rate -- -- NM: Not meaningful. At March 28, 1997, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $651 million before being offset against certain deferred tax liabilities for presentation on the Company's balance sheet. A substantial portion of this asset is realizable based on the ability to offset existing deferred tax liabilities. In the first six months of 1997, a valuation allowance of $199 million was recorded against the deferred tax asset for the benefits of tax losses which may not be realized. Realization of approximately $85 million of the asset is dependent on the Company's ability to generate approximately $245 million of future U.S. taxable income. Management believes that it is more likely than not that the asset will be realized based on forecasted U.S. income. However, there can be no assurance that the Company will meet its expectations of future U.S. income. As a result, the amount of the deferred tax assets considered realizable could be reduced in the near and long term if estimates of future taxable U.S. income are reduced. Such an occurrence could materially adversely affect the Company's financial results and condition. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. 16
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Factors That May Affect Future Results and Financial Condition Overview The Company's future operating results and financial condition are dependent upon the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet dynamic customer demand patterns, and its ability to effect a change in marketplace perception of the Company's prospects, including the viability of the Macintosh platform. Inherent in this process are a number of factors that the Company must successfully manage in order to achieve favorable future operating results and financial condition. Potential risks and uncertainties that could affect the Company's future operating results and financial condition include, without limitation, continued competitive pressures in the marketplace and the effect of any reaction by the Company to such competitive pressures, including pricing actions by the Company; the Company's ability to supply products in certain categories; the Company's ability to 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 make timely delivery of planned enhancements to the current Macintosh operating system ("Mac(R) OS") and to make timely delivery of a new and substantially backward-compatible OS; the Company's ability to successfully integrate NeXT technologies, processes and employees with those at Apple; the Company's ability to successfully implement its strategic direction and restructuring actions, including reducing its expenditures; the Company's ability to attract, motivate and retain employees; the effects of significant adverse publicity; and the availability of third- party software for particular applications. The Company expects that it will not return to profitability until at least the fourth quarter of 1997, if not later. Restructuring of Operations and New Business Model During 1996, the Company began to implement certain restructuring actions aimed at reducing its cost structure, improving its competitiveness, and restoring sustained profitability. In the second quarter of 1997, the Company announced and began to implement supplemental restructuring actions, including significant headcount reductions, to meet the foregoing objectives. There are several risks inherent in the Company's efforts to transition to a new cost structure. These include the risk that the Company will not be able to reduce expenditures quickly enough to restore sustained profitability and the risk that cost-cutting initiatives will impair the Company's ability to innovate and remain competitive in the computer industry. As part of its restructuring effort, the Company has been implementing a new business model. Implementation of the new business model involves several risks, including the risk that by simplifying its product line the Company will increase its dependence on fewer products, potentially reduce overall sales, and increase its reliance on unproven products and technology. Another risk of the new business model is that by increasing the proportion of the Company's products to be manufactured under outsourcing arrangements, the Company could lose control of the quality or quantity of the products manufactured, or lose the flexibility to make timely changes in production schedules in order to respond to changing market conditions. In addition, the new business model could adversely affect employee morale, thereby damaging the Company's ability to retain and motivate employees. Also, because the new business model contemplates that the Company will rely to a greater extent on collaboration and licensing arrangements with third parties, the Company will have less direct control over certain of its research and development efforts, and its ability to create innovative new products may be reduced. In addition, the new business model now includes the acquisition of NeXT. There can be no assurance that the technologies acquired from NeXT will be successfully exploited, or that key NeXT employees and processes will be retained and successfully integrated with those at Apple. Finally, even if the new business model is successfully implemented, there can be no assurance that it will effectively 17
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resolve the various issues currently facing the Company. In addition, although the Company believes that the actions it is taking and will take under its restructuring plan and its acquisition of NeXT should help restore marketplace confidence in the Macintosh platform, there can be no assurance that such actions will be successful. For the foregoing reasons, there can be no assurance that the new business model, including the restructuring actions and the acquisition of NeXT, will enable the Company to achieve its objectives of reducing its cost structure, improving its competitiveness, and restoring sustained profitability. The Company's future operating results and financial condition could be adversely affected should it encounter difficulty in effectively managing the transition to the new business model and cost structure. For information regarding the Company's restructuring actions and the acquisition of NeXT, refer to Notes 2 and 3, respectively, of the Notes to the Consolidated Financial Statements (Unaudited) in Part I, Item I, and to Liquidity and Capital Resources in Part I, Item II of this Quarterly Report on Form 10-Q, which information is hereby incorporated by reference. Product Introductions and Transitions Due to the highly volatile nature of the personal computer industry, which is characterized by dynamic customer demand patterns and rapid technological advances, the Company frequently introduces new products and product enhancements, including the recent introductions of certain PowerBook and Power Macintosh products. The success of new product introductions is dependent on a number of factors, including market acceptance, the Company's ability to manage the risks associated with product transitions, the availability of application software for new products, the effective management of inventory levels in line with anticipated product demand, the availability of products in appropriate quantities to meet anticipated demand, and the risk that new products may have quality or other defects in the early stages of introduction. Accordingly, the Company cannot determine the ultimate effect that new products will have on its sales or results of operations. In addition, although the number of new product introductions may decrease under the Company's new business model, the risks and uncertainties associated with new product introductions may increase as the Company refocuses its product offerings on key growth segments. The rate of product shipments immediately following introduction of a new product is not necessarily an indication of the future rate of shipments for that product, which depends on many factors, some of which are not under the control of the Company. These factors may include initial large purchases by a small segment of the user population that tends to purchase new technology prior to its acceptance by the majority of users ("early adopters"); purchases in satisfaction of pent-up demand by users who anticipated new technology and, as a result, deferred purchases of other products; and overordering by dealers who anticipate shortages due to the aforementioned factors. These factors may be offset by others, such as the deferral of purchases by many users until new technology is accepted as "proven" and for which commonly used software products are available; and the reduction of orders by dealers once they believe they can obtain sufficient supply of products previously in backlog. Backlog is often volatile after new product introductions due to the aforementioned demand factors, often increasing coincident with introduction, and then decreasing once dealers and customers believe they can obtain sufficient supply of the new products. The measurement of demand for newly introduced products is further complicated by the availability of different product configurations, which may include various types of built-in peripherals and software. Configurations may also require certain localization (such as language) for various markets and, as a result, demand in different geographic areas may be a function of the availability of third-party software in those localized versions. For example, the availability of 18
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European-language versions of software products manufactured by U.S. producers may lag behind the availability of U.S. versions by a quarter or more. This may result in lower initial demand for the Company's new products outside the United States, even though localized versions of the Company's products may be available. The increasing integration of functions and complexity of operations of the Company's products also increase the risk that latent defects or other faults could be discovered by customers or end-users after volumes of products have been produced or shipped. If such defects were significant, the Company could incur material recall and replacement costs under product warranties. The Company recently announced a "dual track" approach to its OS development. The Company plans to continue to introduce enhancements to the current Mac OS and later introduce a new OS (code named "Rhapsody") which is expected to offer advanced functionality based upon the Mac OS and NeXT software technologies. However, the NeXT software technologies that the Company plans to use in the development of Rhapsody were not originally designed to be compatible with the Mac OS. As a result, there can be no assurance that the development of Rhapsody will be successful. In addition, Rhapsody may not be fully backward-compatible with all existing applications, which could result in a loss of existing customers. Finally, it is uncertain whether Rhapsody or the planned enhancements to the current Mac OS will gain developer support and market acceptance. Inability to successfully develop and make timely delivery of a substantially backward-compatible Rhapsody or of planned enhancements to the current Mac OS, or to gain developer support and market acceptance for those operating systems, may have an adverse impact on the Company's operating results and financial condition. Competition The personal computer industry is highly competitive and is characterized by aggressive pricing practices, downward pressure on gross margins, frequent introduction of new products, short product life cycles, continual improvement in product price/performance characteristics, price sensitivity on the part of consumers, and a large number of competitors. The Company's results of operations and financial condition have been, and in the future may continue to be, adversely affected by industrywide pricing pressures and downward pressures on gross margins. The industry has also been characterized by rapid technological advances in software functionality and hardware performance and features based on existing or emerging industry standards. Many of the Company's competitors have greater financial, marketing, manufacturing, and technological resources, broader product lines and larger installed customer bases than those of the Company. The Company's future operating results and financial condition may be affected by overall demand for personal computers and general customer preferences for one platform over another or one set of product features over another. The Company is currently the primary maker of hardware that uses the Mac OS. The Mac OS has a minority market share in the personal computer market, which is dominated by makers of computers that run the MS-DOS and Microsoft Windows operating systems. The Company believes that the Mac OS, with its perceived advantages over MS-DOS and Windows, has been a driving force behind sales of the Company's personal computer hardware for the past several years. Recent innovations in the Windows platform, including those included in Windows 95 and Windows NT, have added features to the Windows platform which make the differences between the Mac OS and Microsoft's operating systems less significant. The Company is currently taking and will continue to take steps to respond to the competitive pressures being placed on its personal computer sales as a result of the recent innovations in the Windows platform. The Company's future operating results and financial condition may be affected by its ability to maintain and increase the installed base for the Macintosh platform. As part of its efforts to increase the installed base for the Macintosh platform, the Company announced the licensing of the Mac OS to other personal computer vendors in 1995 and 19
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1996. Several vendors currently sell products that utilize the Macintosh operating system. The Company believes that licensing the operating system will result in a broader installed base on which software vendors can develop and provide technical innovations for the Macintosh platform. However, there can be no assurance that the installed base will be broadened by the licensing of the operating system or that licensing will result in an increase in the number of application software titles or the rate at which vendors will bring to market application software based on the Mac OS. In addition, as a result of licensing its operating system, the Company competes with other companies producing Mac OS-based computer systems. The benefits to the Company from licensing the Mac OS to third parties may be more than offset by the disadvantages of competing with them. As a supplemental means of addressing the competition from MS-DOS and Windows, the Company has devoted substantial resources toward developing personal computer products capable of running application software designed for the MS-DOS or Windows operating systems ("Cross-Platform Products"). These products include the RISC-based PowerPC(TM) microprocessor and either include the Pentium or 586-class microprocessor or can accommodate an add-on card containing a Pentium or 586-class microprocessor. These products enable users to run concurrently applications that require the Mac OS, MS-DOS, Windows 3.1, or Windows 95 operating systems. Depending on customer demand, the Company may supply customers who purchase Cross-Platform Products with Windows operating system software under licensing agreements with Microsoft. However, in order to do so, the Company will need to enter into one or more agreements with certain Microsoft distributors. The Company, International Business Machines Corporation ("IBM") and Motorola, Inc. have agreed upon and announced the availability of specifications for a PowerPC microprocessor-based hardware reference platform. These specifications define a "unified" personal computer architecture that gives access to both the Power Macintosh platform and the PC environment and utilizes standard industry components. The Company's future operating results and financial condition may be affected by its ability to continue to implement this agreement and to manage the risk associated with the transition to this new hardware reference platform. Microsoft recently announced that it would no longer adapt its Windows NT operating system software, which is being used more by corporations, to run on the PowerPC microprocessor. This decision may adversely affect revenues derived from this new hardware reference platform. Decisions by customers to purchase the Company's personal computers, as opposed to MS-DOS or Windows-based systems, are often based on the availability of third-party software for particular applications. The Company believes that the availability of third-party application software for the Company's hardware products depends in part on third-party developers' perception and analysis of the relative benefits of developing, maintaining, and upgrading such software for the Company's products versus software for the larger MS-DOS and Windows market. This analysis is based on factors such as the perceived strength of the Company and its products, the anticipated potential revenue that may be generated, and the costs of developing such software products. To the extent the Company's recent financial losses and declining demand for the Company's product have caused software developers to question the Company's prospects in the personal computer market, developers could be less inclined to develop new application software or upgrade existing software for the Company's products and more inclined to devote their resources to developing and upgrading software for the larger MS-DOS and Windows market. Microsoft Corporation is an important developer of application software for the Company's products. Accordingly, Microsoft's interest in producing application software for the Company's products may be influenced by Microsoft's perception of its interests as the vendor of the Windows operating systems. The Company's ability to produce and market competitive products is also dependent on the ability and desire of IBM and Motorola, Inc., the suppliers of the PowerPC RISC microprocessor for certain of the Company's products, to supply to the Company in adequate numbers 20
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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. In addition, the desire of IBM and Motorola to continue producing these microprocessors may be influenced by Microsoft's decision not to adapt its Windows NT operating system software to run on the PowerPC microprocessor. IBM produces personal computers based on Intel microprocessors as well as workstations based on the PowerPC microprocessor, and is also the developer of OS/2, a competing operating system to the Company's Mac OS. Accordingly,IBM's interest in supplying the Company with microprocessors for the Company's products may be influenced by IBM's perception of its interests as a competing manufacturer of personal computers and as a competing operating system vendor. Several competitors of the Company, including Compaq, IBM, and Microsoft, have either targeted or announced their intention to target certain of the Company's key market segments, including education and publishing. Many of these companies have greater financial, marketing, manufacturing, and technological resources than the Company. The Company is integrating Internet capabilities into its new and existing hardware and software platforms. There can be no assurance that the Company will be able to continue to do so successfully. In addition, the Internet market is rapidly evolving and is characterized by an increasing number of market entrants who have introduced or developed products addressing access to, authoring for, or communication over, the Internet. Many of these competitors have a significant lead over the Company in developing products for the Internet, have significantly greater financial, marketing, manufacturing, and technological resources than the Company, or both. Global Market Risks A large portion of the Company's revenue is derived from its international operations. As a result, the Company's operations and financial results could be significantly affected by international factors, such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. When the U.S. dollar strengthens against other currencies, the U.S. dollar value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens, the U.S. dollar value of non-U.S. dollar-based sales increases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens. Overall, the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect the Company's consolidated sales and gross margins (as expressed in U.S. dollars). To mitigate the short-term impact of fluctuating currency exchange rates on the Company's non-U.S. dollar-based sales, product procurement, and operating expenses, the Company regularly hedges its non-U.S. dollar- based exposures. Specifically, the Company enters into foreign exchange forward and option contracts to hedge its assets, liabilities and firmly committed transactions. Currently, hedges of firmly committed transactions do not extend beyond one year. The Company also purchases foreign exchange option contracts to hedge certain other probable but not firmly committed transactions. Hedges of probable but not firmly committed transactions currently do not extend beyond one year. To reduce the costs associated with these ongoing foreign exchange hedging programs, the Company also regularly sells foreign exchange option contracts and enters into certain other foreign exchange transactions. All foreign exchange forward and option contracts not accounted for as hedges, including all transactions intended to reduce the costs associated with the Company's foreign exchange hedging programs, are carried at fair value and are adjusted on each balance sheet date for changes in exchange rates. 21
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While the Company is exposed with respect to fluctuations in the interest rates of many of the world's leading industrialized countries, the Company's interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash, cash equivalents, and short-term investments as well as interest paid on its notes payable to banks and long-term debt. To mitigate the impact of fluctuations in U.S. interest rates, the Company has entered into interest rate swap, collar, and floor transactions. Certain of these transactions are intended to better match the Company's floating-rate interest income on its cash, cash equivalents, and short-term investments with the fixed-rate interest expense on its long-term debt. The Company also enters into these transactions in order to diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. These instruments may extend the Company's cash investment horizon up to a maximum duration of three years. To ensure the adequacy and effectiveness of the Company's foreign exchange and interest rate hedge positions, as well as to monitor the risks and opportunities of the nonhedge portfolios, the Company continually monitors its foreign exchange forward and option positions, and its interest rate swap, option and floor positions both on a stand-alone basis and in conjunction with its underlying foreign currency- and interest rate- related exposures, respectively, from both an accounting and an economic perspective. However, given the effective horizons of the Company's risk management activities, there can be no assurance that the aforementioned programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either foreign exchange or interest rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company's operating results and financial position. The Company generally does not engage in leveraged hedging. The Company's current financial condition is expected to increase the costs of its hedging transactions, as well as affect the nature of the hedging transactions into which the Company's counterparties are willing to enter. Inventory and Supply The Company provides reserves against any inventories of products that have become obsolete or are in excess of anticipated demand, accrues for any cancellation fees of orders for inventories that have been cancelled, and accrues for the estimated costs to correct any product quality problems. Although the Company believes its inventory and related reserves are adequate, no assurance can be given that the Company will not incur additional inventory and related charges. In addition, such charges have had, and may again have, a material affect on the Company's financial position and results of operations. The Company must order components for its products and build inventory well in advance of product shipments. Because the Company's markets are volatile and subject to rapid technology and price changes, there is a risk that the Company will forecast incorrectly and produce excess or insufficient inventories of particular products. The Company's operating results and financial condition have been in the past and may in the future be materially adversely affected by the Company's ability to manage its inventory levels and respond to short-term shifts in customer demand patterns. Certain of the Company's products are manufactured in whole or in part by third-party manufacturers, either pursuant to design specifications of the Company or otherwise. As a result of the Company's restructuring actions, which include the sale of the Company's Fountain, Colorado, manufacturing facility to SCI Systems, Inc. ("SCI") and a related manufacturing outsourcing agreement with SCI, both in the second quarter of 1996, the proportion of the Company's products produced and distributed under outsourcing arrangements will increase. While outsourcing 22
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arrangements may lower the fixed cost of operations, they will also reduce the direct control the Company has over production. It is uncertain what effect such diminished control will have on the quality or quantity of the products manufactured, or the flexibility of the Company to respond to changing market conditions. Furthermore, any efforts by the Company to manage its inventory under outsourcing arrangements could subject the Company to liquidated damages or cancelation of the arrangement. Moreover, although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company remains at least initially responsible to the ultimate consumer for warranty service. Accordingly, in the event of product defects or warranty liability, the Company may remain primarily liable. Any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could adversely affect the Company's future operating results and financial condition. The Company's ability to satisfy demand for its products may be limited by the availability of key components. The Company believes that the availability from suppliers to the personal computer industry of microprocessors and ASICS presents the most significant potential for constraining the Company's ability to manufacture products. Some advanced microprocessors are currently in the early stages of ramp-up for production and thus have limited availability. The Company and other producers in the personal computer industry also compete for other semiconductor products with other industries that have experienced increased demand for such products, due to either increased consumer demand or increased use of semiconductors in their products (such as the cellular phone and automotive industries). Finally, the Company uses some components that are not common to the rest of the personal computer industry (including certain microprocessors and ASICs). Continued availability of these components may be affected if producers were to decide to concentrate on the production of common components instead of components customized to meet the Company's requirements. Such product supply constraints and corresponding increased costs could decrease the Company's net sales and adversely affect the Company's operating results and financial condition. Marketing and Distribution A number of uncertainties may affect the marketing and distribution of the Company's products. Currently, the Company's primary means of distribution is through third-party computer resellers. Such resellers include consumer channels such as mass-merchandise stores, consumer electronics outlets, and computer superstores. The Company's business and financial results could be adversely affected if the financial condition of these resellers weakened or if resellers within consumer channels were to decide not to continue to distribute the Company's products. Uncertainty over demand for the Company's products may cause resellers to reduce their ordering and marketing of the Company's products. Under the Company's arrangements with its resellers, resellers have the option to reduce or eliminate unfilled orders previously placed, in most instances without financial penalty. Resellers also have the option to return products to the Company without penalty within certain limits, beyond which they may be assessed fees. The Company has experienced a reduction in ordering from historical levels by resellers due to uncertainty concerning the Company's condition and prospects. Other Factors The majority of the Company's research and development activities, its corporate headquarters, and other critical business operations, including certain major vendors, are located near major seismic faults. The Company's operating results and financial condition could be materially adversely affected in the event of a major earthquake. Production and marketing of products in certain states and countries may subject the Company to environmental and other regulations which include, in some instances, the requirement that the Company provide consumers with the ability to return to the Company product at the end of its useful life, and leave responsibility for environmentally safe disposal or recycling with the 23
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Company. It is unclear what effect such regulation will have on the Company's future operating results and financial condition. The Company is currently reevaluating replacement of all its existing transaction systems (which include order management, product procurement, distribution, and finance) with a single integrated system as part of its ongoing effort to increase operational efficiency. The Company's future operating results and financial condition could be adversely affected if the Company is unable to implement and effectively manage the transition to this new integrated system, or, alternatively, if the Company is unable to effectively manage its existing transaction systems. As part of the Company's restructuring plan, the Company entered into a "Master Logistics Management Services" agreement with Ryder Integrated Logistics, Inc. to outsource the Company's domestic operations transportation and logistics management. While this outsourcing agreement, and other similar agreements entered into to outsource the Company's European operations transportation and logistics management, may lower the Company's fixed costs of operations, it will also reduce the direct control the Company has over its transportation and logistics management. It is uncertain what effect such diminished control will have on the Company's transportation and logistics management. As part of the Company's restructuring plan, the Company sold its Napa, California, data center to MCI Systemhouse ("MCI") and entered into a data processing outsourcing agreement with MCI in the fourth quarter of 1996. While this outsourcing agreement may lower the Company's fixed costs of operations, it will also reduce the direct control the Company has over its data processing. It is uncertain what effect such diminished control will have on the Company's data processing. Because of the foregoing factors, as well as other factors affecting the Company's operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. In addition, the Company's participation in a highly dynamic industry often results in significant volatility of the Company's common stock price. Liquidity and Capital Resources The Company's financial position with respect to cash, cash equivalents, and short-term investments, net of notes payable to banks, decreased to $1,326 million at March 28, 1997, from $1,559 million at September 27, 1996. The Company's financial position with respect to cash, cash equivalents, and short-term investments decreased to $1,459 million at March 28, 1997, from $1,745 million at September 27, 1996. The Company's cash and cash equivalent balance at March 28, 1997 and September 27, 1996, includes $167 million and $177 million, respectively, pledged as collateral to support letters of credit primarily associated with the Company's purchase commitments under the terms of the sale of the Company's Fountain, Colorado, manufacturing facility to SCI. Cash generated by operations during the first six months of 1997 totaled $194 million, primarily the result of a decrease in accounts receivable and inventories, partially offset by the Company's net loss adjusted for non- cash expenses such as in-process research and development. The Company expects to use cash to fund operations over at least the next quarter. The Company expects that cash generated from the sale of equity investments and property, plant and equipment will be significantly less for the remainder of 1997 compared with the same period of 1996. 24
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Cash used to acquire NeXT totaled $383 million in the second quarter of 1997. The Company expects no additional cash expenditures related to the NeXT acquisition. Cash used for the purchase of property, plant, and equipment totaled $36 million in the first six months of 1997, and consisted primarily of increases in manufacturing machinery and equipment. The Company expects that the level of capital expenditures for the remainder of 1997 will be comparable to the same period of 1996. In the second quarter of 1997, the Company's senior and subordinated long-term debt were downgraded to B and CCC+, respectively, by Standard and Poor's Rating Agency and to B3 and Caa, respectively, by Moody's Investor Services. The Company was also placed on negative credit watch by Moody's Investor Services. These actions may increase the Company's cost of funds in future periods. In addition, the Company may be required to pledge additional collateral with respect to certain of its borrowings and letters of credit and to agree to more stringent covenants than in the past. The Company believes that its balances of cash and cash equivalents and short-term investments, together with continued short-term borrowings from banks, will be sufficient to meet its cash requirements over the next 12 months. In addition to funding an expected net loss for at least the next quarter, expected cash requirements over the next twelve months include an estimated $170 million to effect actions under the restructuring plan, most of which will be effected over the next two quarters. Also, the notes payable to banks all become due prior to July 1, 1997. No assurance can be given that short-term borrowings from banks can be continued, or that any additional required financing could be obtained should the restructuring plan take longer to implement than anticipated or be unsuccessful. If the Company is unable to obtain such financing, its liquidity, results of operations, and financial condition would be materially adversely affected. The Internal Revenue Service has proposed federal income tax deficiencies for the years 1984 through 1991, and the Company has made certain prepayments thereon. The Company contested the proposed deficiencies for the years 1984 through 1988, and most of the issues in dispute for these years have been resolved. On June 29, 1995, the IRS issued a notice of deficiency proposing increases to the amount of the Company's federal income taxes for the years 1989 through 1991. The Company has filed a petition with the United States Tax Court to contest these alleged tax deficiencies. Management believes that adequate provision has been made for any adjustments that may result from these tax examinations. 25
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PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to page 45 of the Company's 1996 Annual Report on Form 10-K under the subheading "Litigation" and to page 23 of the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1996 under the heading "Legal Proceedings" for a discussion of certain purported shareholder class action suits, certain consumer class actions relating to monitor-size advertising, and "repetitive stress injury" claims. In February 1997, the Court in the case styled Abraham and Evelyn Kostick Trust v. Peter Crisp et. al. sustained the Company's demurrer with respect to purported class action claims and overruled it with respect to purported derivative claims. In April 1997, the Company filed a motion to strike most of the substantive allegations of the second amended complaint. In February 1997, the Court in the case styled Derek Pritchard v. Michael Spindler et. al. sustained the Company's demurrer and dismissed the plaintiff's first amended complaint, with prejudice. In March 1997, the plaintiff in the case styled LS Men's Clothing Defined Benefit Pension Fund v. Michael Spindler et. al. filed an amended complaint expanding the class period from April 4, 1995 to January 15, 1997 and adding several current and former officers of the Company as defendants. The Company intends to file a demurrer seeking dismissal of the amended complaint. In March 1997, the court in the case styled In re Computer Monitor Litigation preliminarily approved a proposed settlement to which the Company and all but three of the other defendants in the action are parties and provisionally certified a settlement class with respect thereto. A hearing regarding final approval of the proposed settlement is scheduled for June 30, 1997. If approved, the Company does not anticipate its obligations pursuant to the proposed settlement will have a material adverse effect on its financial condition as reported in the accompanying financial statements. The Company has various other claims, lawsuits, disputes with third parties, investigations and pending actions involving allegations of false or misleading advertising, product defects, discrimination, infringement of intellectual property rights, and breach of contract and other matters against the Company and its subsidiaries incident to the operation of its business. The liability, if any, associated with these matters was not determinable as of the date of this filing. The Company believes the resolution of the matters cited above will not have a material adverse effect on its financial condition as reported in the accompanying financial statements. However, depending on the amount and timing of any unfavorable resolution of these lawsuits, it is possible that the Company's future results of operations or cash flows could be materially affected in a particular period. 26
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Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Note Description 3.3 By-Laws of Apple Computer, Inc., as amended through April 4, 1997. 10.A.3-2 Amendment No. 2 to the Apple Computer, Inc. Savings and Investment Plan. 10.A.5 97/S8/A 1990 Stock Option Plan, as amended through December 4, 1996. 10.A.6 97/S8/A Apple Computer, Inc. Employee Stock Purchase Plan, as amended through December 4, 1996. 10.A.26 97/S8/B Employment Agreement dated as of February 28, 1996 between Apple Computer, Inc. and Dr. Gilbert F. Amelio. 10.A.42 Senior Officers Restricted Performance Share Plan, as amended through March 25, 1997. 10.A.43 97/S8/A NeXT Computer, Inc. 1990 Stock Option Plan, as amended. 10.A.44 Non-Employee Director Stock Plan. 27 Financial Data Schedule. Notes 97/S8/A-10.A.5, 10.A.6, 10.A.43 Incorporated by reference to Exhibit 4.2, 4.3 and 4.4, respectively, in the Company's Registration Statement on Form S-8 filed March 21, 1997, titled "1990 Stock Option Plan; Employee Stock Purchase Plan; NeXT Software, Inc. 1990 Stock Option Plan". 97/S8/B-10.A.26 Incorporated by reference to Exhibit 10.A.26 in the Company's Registration Statement on Form S-8 filed March 21, 1997, titled "Senior Officers Restricted Performance Share Plan, and Employment Agreement dated as of February 28, 1996 between Apple Computer, Inc. and Dr. Gilbert F. Amelio". 27
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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 May 9, 1997 28
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INDEX TO EXHIBITS Exhibit Index Number Note Description Page 3.3 By-Laws of Apple Computer, Inc., as amended through April 4, 1997. 30 10.A.3-2 Amendment No. 2 to the Apple Computer, Inc. Savings and Investment Plan. 48 10.A.5 (1) 1990 Stock Option Plan, as amended through December 4, 1996. 27 10.A.6 (1) Apple Computer, Inc. Employee Stock Purchase Plan, as amended through December 4, 1996. 27 10.A.26 (1) Employment Agreement dated as of February 28, 1996 between Apple Computer, Inc. and Dr. Gilbert F. Amelio. 27 10.A.42 Senior Officers Restricted Performance Share Plan, as amended through March 25, 1997 49 10.A.43 (1) NeXT Computer, Inc. 1990 Stock Option Plan, as amended. 27 10.A.44 Non-Employee Director Stock Plan 58 27 Financial Data Schedule. 70 (1) Incorporated by reference at page indicated. 29

Dates Referenced Herein   and   Documents Incorporated by Reference

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12/15/978
7/1/9726
6/30/9727
Filed on:5/12/97
5/9/9729
5/2/97112
4/4/972830
For Period End:3/28/97125
3/25/9728
3/21/9728S-8
2/4/977
1/31/9712DEFA14A,  SC 13G
1/15/9727
12/27/962710-Q,  DEF 14A
12/4/9628308-K,  8-K/A
9/27/9632510-K
3/29/9651110-Q
3/28/967
2/28/962830
6/29/9526
4/4/9527
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