________________________________________________________________
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
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)
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
1
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
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
2
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
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
4
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
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
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
The following table depicts the restructuring activity from September 27,
1996 to March 28, 1997: (In millions)
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
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
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)
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
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
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
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
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.
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
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.
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
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
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.
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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