________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 27, 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
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 [ ]
124,669,324 shares of Common Stock Issued and Outstanding as of
January 31, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in millions, except per share amounts)
THREE MONTHS ENDED
December 27, December 29,
1996 1995
Net sales $ 2,129 $ 3,148
Costs and expenses:
Cost of sales 1,732 2,673
Research and development 149 153
Selling, general and
administrative 372 441
2,253 3,267
Operating loss (124) (119)
Interest and other
income (expense), net 4 10
Loss before benefit from
income taxes (120) (109)
Benefit from income taxes -- (40)
Net loss $ (120) $ (69)
Loss per common share $(0.96) $(0.56)
Cash dividends paid
per common share $ -- $ .12
Common shares used in
the calculations of
loss per share
(in thousands) 124,532 122,994
See accompanying notes.
2
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
December 27, September 27,
1996 1996
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,174 $ 1,552
Short-term investments 633 193
Accounts receivable, net
of allowance for doubtful
accounts of $92 ($91 at
September 27, 1996) 1,492 1,496
Inventories:
Purchased parts 176 213
Work in process 24 43
Finished goods 288 406
488 662
Deferred tax assets 324 342
Other current assets 308 270
Total current assets 4,419 4,515
Property, plant, and equipment:
Land and buildings 484 480
Machinery and equipment 543 544
Office furniture and equipment 122 136
Leasehold improvements 178 188
1,327 1,348
Accumulated depreciation
and amortization (734) (750)
Net property, plant,
and equipment 593 598
Other assets 260 251
$ 5,272 $ 5,364
See accompanying notes.
3
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
December 27, September 27,
1996 1996
(Unaudited)
Current liabilities:
Notes payable to banks $ 180 $ 186
Accounts payable 820 791
Accrued compensation and
employee benefits 112 120
Accrued marketing and
distribution 363 257
Accrued warranty and related 157 181
Accrued restructuring costs 105 117
Other current liabilities 307 351
Total current liabilities 2,044 2,003
Long-term debt 950 949
Deferred tax liabilities 336 354
Shareholders' equity:
Common stock, no par value;
320,000,000 shares authorized;
124,585,025 shares issued
and outstanding at December
27, 1996 (124,496,972 shares
at September 27, 1996) 442 439
Retained earnings 1,514 1,634
Other (14) (15)
Total shareholders' equit 1,942 2,058
$ 5,272 $ 5,364
See accompanying notes.
4
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (Unaudited)
(In millions)
THREE MONTHS ENDED
December 27, December 29,
1996 1995
Cash and cash equivalents, beginning
of the period $ 1,552 $ 756
Operating:
Net loss (120) (69)
Adjustments to reconcile net loss to cash
generated by operating activities:
Depreciation and amortization 25 42
Net book value of property, plant,
and equipment retirements 2 1
Changes in assets and liabilities:
Accounts receivable 4 (13)
Inventories 174 (172)
Deferred tax assets 18 (51)
Other current assets (38) 57
Accounts payable 29 266
Other current liabilities 18 78
Deferred tax liabilities (18) 48
Cash generated by operating activities 94 187
Investing:
Purchase of short-term investments (542) (244)
Proceeds from sale of short-term
investments 102 164
Purchase of property, plant, and equipment (20) (31)
Other (10) (36)
Cash used for investing activities (470) (147)
Financing:
Increase (decrease) in short-term borrowings (6) 37
Increase in long-term borrowings 1 1
Increases in common stock, net of related
tax benefits 3 5
Cash dividends -- (15)
Cash generated by (used for) financing
activities (2) 28
Total cash generated (used) (378) 68
Cash and cash equivalents,
end of the period $ 1,174 $ 824
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 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. The restructuring actions under this plan that
the Company has taken and intends to take consist primarily of
terminating approximately 1,500 full-time employees (down
from an initial planned termination of approximately 2,800),
approximately 900 of whom have been terminated from plan
inception through December 27, 1996, 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 these
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 as a result of terminating eWorld(trademark), Apple's
on-line service. These actions resulted in an initial charge of
$207 million. The charge was adjusted downward by $28 million
in the fourth quarter of 1996, primarily as a result of greater than
expected voluntary terminations, which led to fewer than planned
involuntary terminations, as well as lower than expected costs to
cancel or vacate certain facility leases, partially offset by greater
than expected costs to cancel certain contracts and to write down
certain operating assets sold or to be sold. The restructuring
actions have resulted in cash expenditures of $66 million and
noncash asset write-downs of $8 million from plan inception
through December 27, 1996. The Company expects that the
remaining $105 million accrued balance at December 27, 1996,
will result in cash expenditures of approximately $50 million
over the next twelve months and approximately $9 million
thereafter. The Company expects that most of the contemplated
restructuring actions related to the plan implemented in the
second quarter of 1996 will be completed within the next six
months and will be financed through current working capital and
continued short-term borrowings.
6
The following table depicts the restructuring activity from
September 27, 1996 to December 27, 1996: (In millions)
Category Balance at Balance at
September 27, December 27,
1996 Spending 1996
Payments to employees
involuntarily terminated (C) $33 $6 $27
Payments on canceled or vacated
facility leases (C) 15 3 12
Write-down of operating assets
to be sold (N) 47 1 46
Payments on canceled contracts (C) 22 2 20
$117 $12 $105
C: Cash; N: Noncash
The Company recently announced that supplemental
restructuring actions, including significant headcount reductions,
will be necessary to meet the foregoing objectives of the 1996
restructuring plan. The Company expects to recognize a charge
for the estimated costs of those actions when the details of the
related supplemental plan are announced later in the second
quarter.
3. On February 4, 1997, the Company acquired all of the
outstanding shares of NeXT Software, Inc. ("NeXT"). NeXT,
headquartered in Redwood City, California, develops, markets and
supports 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
comprehensive purchase price, which is comprised of $325
million of cash; the issuance of 1.5 million shares of the
Company's common stock; the issuance of approximately 1.8
million options to purchase the Company's common stock; the
assumption of approximately $55 million of net monetary
liabilities; and approximately $5 million of closing and related
costs, is expected to be approximately $430 million. The
comprehensive purchase price is expected to require cash
expenditures of approximately $385 million, substantially all of
which will be expended in the second quarter. The acquisition
will be treated as a purchase for accounting purposes. The
Company expects that approximately 75% of the comprehensive
purchase price will be expensed as in-process research and
development in the second quarter.
4. The information set forth in Item 1 of Part II hereof is hereby
incorporated by reference.
7
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)
First First First Fourth
Results of Quarter Quarter Change Quarter Quarter Change
Operations 1997 1996 1997 1996
Net sales $ 2,129 $ 3,148 (32%) $ 2,129 $ 2,321 (8%)
Gross margin $ 397 $ 475 (16%) $ 397 $ 511 (22%)
Percentage of
net sales 18.6% 15.1% 18.6% 22.0%
Research and
Development $ 149 $ 153 (3%) $ 149 $ 146 2%
Percentage of
net sales 7.0% 4.9% 7.0% 6.3%
Selling, General and
Administrative $ 372 $ 441 (16%) $ 372 $ 359 4%
Percentage of
net sales 17.5% 14.0% 17.5% 15.5%
Restructuring costs $ -- $ -- -- $ -- $ (28) NM
Percentage of net
sales -- -- -- (1.2%)
Interest and Other
Income(Expense), net $ 4 $ 10 (60%) $ 4 $ 6 (33%)
Net income (loss) $ (120) $ (69) (74%) $ (120) $ 25 (580%)
Earnings (loss)
per share $(0.96) $(0.56) (71%) $ (0.96)$ 0.20 (580%)
NM: Not meaningful.
Overview
During the first quarter of 1997, the Company continued to experience
declines in net sales, units shipped and share of the personal computer
market. This continued decline in demand and the resulting operating
loss, coupled with intense price competition throughout the industry,
has led to the Company's announcement that supplemental restructuring
actions, including significant headcount reductions, will be necessary
in order to reduce costs and return the Company to sustainable
profitability. The details of those actions are expected to be announced
later in the second quarter. The Company has also acquired NeXT. The
Company plans to develop and market a new operating system ("OS")
based on its Mac OS and NeXT software technologies.
Net Sales
Q1 97 compared with Q1 96
Net sales decreased 32% in the first quarter of 1997 compared with the
same period of 1996. Total Macintosh computer unit sales and
peripheral unit sales decreased 29% and 27%, respectively, in the first
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(registered trademark) line of consumer-oriented products,
which the Company believes was due principally to customer concerns
regarding the Company's strategic direction, financial condition, and
future prospects, 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
PowerBook(registered trademark) and Power Macintosh(registered
trademark) products due to product transition constraints on
manufacturing and the unavailability of sufficient quantities of certain
components. The average aggregate revenue per Macintosh unit
decreased 10% in the first quarter of 1997
8
compared with the same period of 1996, primarily due to continued
pricing actions, including rebates, across most product lines in order to
stimulate demand. The average aggregate revenue per peripheral product
increased 12% in the first quarter of 1997 compared with the same
period of 1996, as a result of a shift in mix toward higher priced
products, partially offset by continued pricing actions, including
rebates, across most product lines in order to stimulate demand.
International net sales represented 56% of total net sales in the first
quarter of 1997 compared with 51% in the same period of 1996.
International net sales declined 25% in the first quarter of 1997
compared with the same period of 1996. Net sales in European markets
decreased during the first quarter of 1997 compared with the same period
in 1996, as a result of decreases in Macintosh and peripheral unit sales,
partially offset by an increase in the average aggregate revenue per
peripheral unit. The average aggregate revenue per Macintosh unit
remained constant in the first quarter of 1997 compared with the same
period of 1996. Net sales in Japan decreased during the first 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, slightly offset by an increase in the average
aggregate revenue per peripheral unit.
Domestic net sales declined 40% in the first quarter of 1997, over the
comparable period of 1996, due to decreases in unit sales of Macintosh
computers and peripheral products and the average aggregate revenue per
Macintosh unit, slightly offset by an increase in the average aggregate
revenue per peripheral unit.
According to an industry source, in the first quarter of 1997 compared
with the comparable period of 1996, the Company's share of the
worldwide and U.S. personal computer markets declined to 4.3% from
7.0% and to 5.2% from 9.4%, respectively. In addition, the Company
believes that its licensees' share of the worldwide personal computer
market increased to approximately 0.5% from approximately 0.1%.
Q1 97 compared with Q4 96
Net sales decreased 8% in the first quarter of 1997 compared with the
fourth quarter of 1996. Total Macintosh computer unit sales decreased
by less than 1% in the first quarter of 1997 compared with the prior
quarter as a result of a decline in unit sales of entry-level and
PowerBook products, substantially offset by an increase in unit sales of
Performa and Power Macintosh products. PowerBook unit sales were
negatively affected as a result of the Company's inability to fulfill all
purchase orders due to product transition constraints on manufacturing.
In addition, although Performa unit sales increased compared with the
fourth quarter of 1996, they were substantially lower than the Company
expected for the holiday buying season. Unit sales of peripheral
products increased 11% in the first quarter of 1997 compared with the
fourth quarter of 1996. The average aggregate revenue per Macintosh
and peripheral unit decreased 11% and 2%, respectively, in the first
quarter of 1997 compared with the fourth quarter of 1996, primarily due
to continued pricing actions, including rebates, taken on most product
lines in order to stimulate demand. The average 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 56% of total net sales in the first
quarter of 1997, compared with 47% in the fourth quarter of 1996.
International net sales increased 9% in the first quarter of 1997
compared with the fourth quarter of 1996. Net sales in European
markets increased during the first quarter of 1997 compared with the
fourth quarter of 1996, as a result of increases in Macintosh and
peripheral unit sales and average aggregate revenue per Macintosh unit,
slightly offset by a decrease in the average aggregate revenue per
peripheral unit. Net sales in Japan decreased during the first quarter of
1997 compared with the fourth quarter of 1996, as a result of decreases
in Macintosh unit sales and average aggregate revenue per Macintosh
and peripheral unit, partially offset by an increase in peripheral unit
sales over the prior quarter.
9
Domestic net sales declined 24% in the first quarter of 1997 compared
with the prior quarter, due to decreases in Macintosh unit sales and the
average aggregate revenue per Macintosh unit, slightly offset by
increases in peripheral unit sales and the average aggregate revenue per
peripheral unit.
According to an industry source, in the first quarter of 1997 compared
with the fourth quarter of 1996, the Company's share of the worldwide
and U.S. personal computer markets declined to 4.3% from 5.3%, and
to 5.2% from 7.2%, respectively. In addition, the Company believes
that its licensees' share of the worldwide personal computer market
increased to approximately 0.5% from approximately 0.2%.
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 was
approximately $454 million at January 31, 1997 and consisted
primarily of the Company's PowerBook and PowerMacintosh products.
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 be below the level of the
prior year's comparable periods through at least the fourth quarter of
1997, if not longer. In addition, the Company believes that net sales in
the second quarter of 1997 will be below the level of the first quarter of
1997.
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.
Gross margin increased as a percentage of sales in the first quarter of
1997, compared with the same period of 1996, primarily as a result of
more aggressive pricing actions taken relative to product costs in the
first quarter of 1996 in order to stimulate demand and increase market
share.
Gross margin decreased as a percentage of sales in the first quarter of
1997, compared with the fourth quarter of 1996, primarily as a result of
continued pricing actions, including rebates, taken on most product
lines in order to stimulate demand and reduced sales of fully reserved
product, partially offset by a decrease in charges incurred to provide for
the costs to correct certain quality problems in certain products.
10
The gross margin levels in the first quarter of 1997 compared with first
and fourth quarters of 1996 were also slightly negatively impacted as a
result of a stronger U.S. dollar relative to certain foreign currencies,
partially 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 first quarter 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.
Research and First First First Fourth
Development Quarter Quarter Quarter Quarter
1997 1996 Change 1997 1996 Change
Research and
development $ 149 $ 153 (3%) $ 149 $ 146 2%
Percentage of
net sales 7.0% 4.9% 7.0% 6.3%
Research and development expenditures were relatively flat in the first
quarter of 1997 compared with the first and fourth quarters of 1996. The
increase as a percentage of net sales resulted from a decrease in the level
of net sales.
The Company believes its research and development expenditures will
be relatively flat in the second quarter of 1997 compared with the same
period of the prior year and with the first quarter of 1997. The Company
believes its research and development expenditures will decrease in the
third and fourth quarters of 1997 compared with the same periods of the
prior year and compared with the immediate prior quarters, as a result of
expected actions under the Company's 1997 supplemental restructuring
plan, the details of which will be announced later in the second quarter.
In addition, as a result of the acquisition of NeXT, the Company
believes it will take a substantial charge to in-process research and
development at the time of the completion of the purchase which
occurred in the second quarter. For additional information regarding the
1997 supplemental restructuring plan 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.
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.
11
First First First Fourth
Selling, General and Quarter Quarter Quarter Quarter
Administrative 1997 1996 Change 1997 1996 Change
Selling, general and
administrative $ 372 $ 441 (16%) $ 372 $ 359 4%
Percentage of net
sales 17.5% 14.0% 17.5% 15.5%
Selling, general and administrative expenses decreased in amount in the
first quarter of 1997 when compared with the corresponding period of
1996, primarily due to reduced expenditures as a result of actions taken
under the Company's 1996 restructuring plan. Selling, general and
administrative expenses increased in amount in the first quarter of 1997
when compared with the fourth quarter of 1996 primarily as a result of
increased advertising and marketing expenditures incurred during the
holiday buying season. Selling, general and administrative expenses
increased as a percentage of net sales in the first quarter of 1997 when
compared to the first and fourth quarters of 1996, as a result of a
decrease in the level of net sales.
The Company believes its selling, general and administrative
expenditures will decrease slightly in the second quarter of 1997
compared with the first quarter of 1997, as a result of lower advertising
and marketing expenditures and further implementation of the 1996
restructuring plan. The Company believes its selling, general and
administrative expenditures will decrease in the third and fourth quarters
of 1997 compared with the same quarters of the prior year and compared
with the immediate prior quarters, as a result of its anticipated actions
under the 1997 supplemental restructuring plan, the details of which
will be announced later in the second quarter, partially offset by the
amortization expense on the intangible assets the Company expects to
recognize 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.
First First First Fourth
Restructuring Costs Quarter Quarter Quarter Quarter
1997 1996 Change 1997 1996 Change
Restructuring costs -- -- -- $ (28) NM
Percentage of net
sales -- -- -- (1.2%)
NM: Not meaningful.
For information regarding the Company's restructuring actions initiated
in the second quarter of 1996, including the adjustment to the
restructuring charge in the fourth quarter of 1996, refer to
12
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.
The Company recently announced that supplemental restructuring
actions, including significant headcount reductions, will be necessary to
meet the objectives of the 1996 restructuring plan. The Company
expects to recognize a charge for the estimated costs of those actions
when the details of the related supplemental plan are announced later in
the second quarter.
First First First Fourth
Interest and Other Quarter Quarter Quarter Quarter
Income(Expense), Net 1997 1996 Change 1997 1996 Change
Interest and other
income (expense), net $ 4 $ 10 (60%) $ 4 $ 6 (33%)
Interest and other income (expense), net, decreased slightly in the first
quarter of 1997 compared with the same period of 1996, primarily as a
result of lower net gains on foreign exchange instruments, partially
offset by higher interest income. Interest and other income (expense),
net, was relatively unchanged in the first quarter of 1997 compared with
the fourth quarter of 1996. The Company expects interest income to
decrease in the second, 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 1997 supplemental restructuring
actions and the remaining 1996 restructuring actions, and fund
operations over at least the next two quarters.
In January 1997, the Company's senior and subordinated long-term debt
were downgraded to B and CCC+, respectively, by Standard and Poor's
Rating Agency. The Company was also placed on negative credit watch
by Moody's Investor Services. These actions could increase the
Company's cost of funds in future periods.
First First First Fourth
Income Tax Provision Quarter Quarter Quarter Quarter
(Benefit) 1997 1996 Change 1997 1996 Change
Provision (benefit)
for income taxes -- $ (40) NM -- $ 15 NM
Effective tax rate -- 37% -- 37%
NM: Not meaningful.
At December 27, 1996, the Company had deferred tax assets arising
from deductible temporary differences, tax losses, and tax credits of
$519 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 quarter a valuation allowance of $41 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
13
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.
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, and its ability to effect a
change in marketplace perception of the Company's prospects. 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 make timely delivery to the marketplace of
technological innovations, including its ability to make timely delivery
of planned enhancements to the current Mac 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; uncertainties concerning
the Company's ability to successfully implement its strategic direction
and restructuring actions, including the expected supplemental
restructuring actions; the effects of significant adverse publicity; and the
availability of third-party software for particular applications.
The Company expects to incur a substantial loss in the second quarter
as a result of the aforementioned in-process research and development
and restructuring charges, and the aforementioned expected decrease in
net sales compared with the first quarter of 1997. 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. The Company
recently announced that supplemental restructuring actions, including
significant headcount reductions, will be necessary in order to meet the
foregoing objectives. The details of the 1997 supplemental restructuring
plan will be announced later in the second quarter. 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
14
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 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 current and supplemental restructuring plans, 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. 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.
15
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 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 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.
16
The Company is currently the primary maker of hardware that uses the
Macintosh operating system ("Mac(registered trademark) 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 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 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 January 1995, as well as an additional
licensing initiative in 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(trademark) 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.
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
17
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
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.
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).
18
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.
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.
19
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, the proportion of the
Company's products produced and distributed under outsourcing
arrangements will increase. While outsourcing 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.
20
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 Company. It is unclear what effect
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, 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.
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. 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,
increased to $1,627 million at December 27, 1996, from $1,559
million at September 27, 1996. The Company's financial position with
respect to cash, cash equivalents, and short-term investments increased
to $1,807 million at December 27, 1996, from $1,745 million at
September 27, 1996. The Company's cash and cash equivalent balance
at December 27, 1996 and September 27, 1996, includes $174 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 quarter of 1997 totaled $94
million, primarily the result of a decrease in inventories, partially offset
by the Company's net loss. The Company expects to use cash to fund
operations over at least the remainder of 1997, if not longer.
21
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. Cash
used for the purchase of property, plant, and equipment totaled $20
million in the first three 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 January 1997, the Company's senior and subordinated long-term debt
were downgraded to B and CCC+, respectively, by Standard and Poor's
Rating Agency. 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 net losses over at least
the next two quarters, expected cash requirements include, without
limitation, an estimated $385 million for the acquisition of NeXT, an
estimated $59 million to complete the remaining actions under the
1996 restructuring plan, and an as yet unquantified amount for the
actions under the expected 1997 supplemental restructuring plan. 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 plans 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.
22
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" 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 December 1996, the Company filed a demurrer to the first amended
complaint in the case styled Derek Pritchard v. Michael Spindler et al.,
and in January 1997 filed a demurrer to the complaint in the action
entitled LS Men's Clothing Defined Benefit Pension Fund v. Michael
Spindler et al.
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.
23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
2 Agreement and Plan of Merger Among Apple
Computer, Inc., Blackbird Acquisition Corporation
and NeXT Software, Inc., dated as of December 20,
1996.
10.A.41 Employment Agreement effective December 2, 1996,
between Registrant and John B. Douglas III.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Current Reports on Form 8-K, dated October 28, 1996 and
December 24, 1996, respectively, were filed by Registrant with the
Securities and Exchange Commission to report under Item 5 thereof the
press release issued to the public on October 16, 1996 regarding the
Registrant's fourth quarter results and the press release issued to the
public on December 20, 1996 regarding the ageement to acquire NeXT
Software,Inc.
Current Reports on Form 8-K dated December 13, 1996 and
Form 8-K/A dated December 20, 1996 respectively, were filed by
Registrant with the Securities and Exchange Commission to report
under Item 4 thereof the Registrant's appointment on December 4,
1996, of KPMG Peat Marwick LLP as the Company's Certifying
Accountant.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
APPLE COMPUTER, INC.
(Registrant)
By: /s/Fred D. Anderson
Fred D. Anderson
Executive Vice President and Chief Financial Officer
February 7, 1997
25
INDEX TO EXHIBITS
Exhibit
Index
Number Description Page
2 Agreement and Plan of Merger Among Apple Computer, Inc.,
Blackbird Acquisition Corporation and NeXT Software, Inc.,
dated as of December 20, 1996. 27
10.A.41 Employment Agreement effective December 2, 1996, between
Registrant and John B. Douglas III. 71
27 Financial Data Schedule. 75
26