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 27, 1998 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 942404110
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1 Infinite Loop
Cupertino, California 95014
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (408) 996-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Share Purchase Rights
(Titles of classes)
___________
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 ____
133,040,579 shares of Common Stock Issued and Outstanding as of May 1, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in millions, except per share amounts)
THREE MONTHS SIX MONTHS
ENDED ENDED
March 27, March 28, March 27, March 28,
1998 1997 1998 1997
Net sales $ 1,405 $ 1,601 $ 2,983 $ 3,730
Costs and expenses:
Cost of sales 1,056 1,298 2,281 3,030
Research and development 75 141 154 290
Selling, general and
administrative 223 348 457 720
In-process research and
development -- 375 -- 375
Restructuring costs -- 155 -- 155
____ _____ _____ _____
1,354 2,317 2,892 4,570
Operating income (loss) 51 (716) 91 (840)
Interest and other income
(expense), net 8 8 15 12
____ _____ _____ _____
Income (loss) before provision
for income taxes 59 (708) 106 (828)
Provision for income taxes 4 -- 4 --
____ _____ _____ _____
Net income (loss) $ 55 $ (708) $ 102 $ (828)
____ _____ _____ _____
Earnings (loss) per common share:
Basic $ 0.42 $ (5.64) $ 0.78 $ (6.62)
Diluted $ 0.38 $ (5.64) $ 0.71 $ (6.62)
Shares used in computing earnings (loss)
per common share (in thousands):
Basic 131,969 125,609 130,021 125,071
Diluted 145,915 125,609 142,769 125,071
See accompanying notes to condensed consolidated financial statements
(unaudited).
2
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
March 27, 1998 September 26, 1997
(Unaudited)
Current assets:
Cash and cash equivalents $1,285 $ 1,230
Short-term investments 538 229
Accounts receivable, net of allowance for
doubtful accounts of $96 ($99 at
September 26, 1997) 807 1,035
Inventories:
Purchased parts 87 141
Work in process 6 15
Finished goods 164 281
257 437
Deferred tax assets 201 259
Other current assets 125 234
______ ______
Total current assets 3,213 3,424
Property, plant, and equipment:
Land and buildings 402 453
Machinery and equipment 396 460
Office furniture and equipment 97 110
Leasehold improvements 136 172
1,031 1,195
Accumulated depreciation and amortization (616) (709)
Net property, plant, and equipment 415 486
Other assets 335 323
______ ______
$ 3,963 $ 4,233
See accompanying notes to condensed consolidated financial statements
(unaudited).
3
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
March 27, 1998 September 26, 1997
(Unaudited)
Current liabilities:
Notes payable to banks $ 23 $ 25
Accounts payable 523 685
Accrued compensation and employee benefits 96 99
Accrued marketing and distribution 231 278
Accrued warranty and related 129 128
Accrued restructuring costs 113 180
Other current liabilities 269 423
______ ______
Total current liabilities 1,384 1,818
Long-term debt 953 951
Deferred tax liabilities 238 264
Shareholders' equity:
Series A non-voting convertible preferred
stock, no par value; 150,000 shares authorized,
issued and outstanding 150 150
Common stock, no par value; 320,000,000 shares
authorized; 132,991,463 shares issued and
outstanding at March 27, 1998 (127,949,220
shares at September 26, 1997) 590 498
Retained earnings 691 589
Other (43) (37)
______ ______
Total shareholders' equity 1,388 1,200
______ ______
$ 3,963 $ 4,233
See accompanying notes to condensed consolidated financial statements
(unaudited).
4
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in millions)
SIX MONTHS ENDED
March 27, 1998 March 28, 1997
Cash and cash equivalents,
beginning of the period $1,230 $1,552
Operating:
Net income (loss) 102 (828)
Adjustments to reconcile net income (loss) to
cash generated by operating activities:
Depreciation and amortization 56 55
Loss on sale of property, plant and equipment -- 31
In-process research and development -- 375
Provision for deferred income taxes 1 (45)
Changes in operating assets and liabilities, net of
effects of acquisition of NeXT:
Accounts receivable 220 356
Inventories 180 153
Other current assets 89 49
Accounts payable (162) 48
Accrued restructuring costs (60) 130
Other current liabilities (130) (123)
_____ _____
Cash generated by operating activities 296 201
Investing:
Purchase of short-term investments (941) (671)
Proceeds from sales and maturities of
short-term investments 632 678
Net proceeds from sale of property, plant,
and equipment 45 1
Purchase of property, plant, and equipment (12) (36)
Cash used to acquire NeXT -- (383)
Other 23 (25)
_____ _____
Cash used for investing activities (253) (436)
Financing:
Increase (decrease) in notes payable to banks (2) (53)
Increase (decrease) in long-term borrowings 2 1
Increases in common stock 12 8
_____ _____
Cash generated by (used for) financing activities 12 (44)
Total cash generated (used) 55 (279)
Cash and cash equivalents, end of the period $1,285 $1,273
_____ _____
Supplemental cash flow disclosures:
Cash paid during the period for interest $ 30 $ 30
Cash paid (received) during the period for
income taxes, net $ (5) $ 24
See accompanying notes to condensed consolidated financial statements
(unaudited).
5
APPLE COMPUTER, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
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 Condensed Consolidated
Financial Statements (Unaudited). 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 26, 1997, included in its Annual Report on
Form 10-K for the year ended September 26, 1997 (the "1997 Form 10-K").
Note 2 - Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share." In accordance with SFAS 128, primary
earnings per share have been replaced with basic earnings per share, and fully
diluted earnings per share have been replaced with diluted earnings per share
which includes potentially dilutive securities such as outstanding options and
convertible securities. Prior periods have been presented to conform to SFAS
128; however, as the Company had a net loss in the prior periods presented,
basic and diluted loss per share are the same as the primary loss per share
previously reported.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding during the period increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of outstanding
options is reflected in diluted earnings per share by application of the
treasury stock method. The dilutive effect of convertible securities is
reflected using the if-converted method. The following table sets forth the
computation of basic and diluted earnings (loss) per share (in thousands,
except net income (loss) and per share amounts):
6
For the Three Months Ended For the Six Months Ended
March 27, March 28, March 27, March 28,
1998 1997 1998 1997
Numerator:
Net income (loss)
(in millions) $ 55 $ (708) $ 102 $ (828)
Denominator:
Denominator for basic
earnings (loss) per share
-- weighted average
shares outstanding 131,969 125,609 130,021 125,071
Effect of dilutive securities:
Convertible preferred
stock 9,091 -- 9,091 --
Dilutive options 4,855 -- 3,657 --
Dilutive potential
common shares 13,946 -- 12,748 --
Denominator for diluted
earnings per share -
adjusted weighted-average
shares and assumed
conversions 145,915 125,609 142,769 125,071
Basic earnings (loss)
per share $ 0.42 $ (5.64) $ 0.78 $ (6.62)
Diluted earnings (loss)
per share $ 0.38 $ (5.64) $ 0.71 $ (6.62)
The Company has outstanding $661 million of unsecured convertible subordinated
notes (the "Notes") which are convertible by their holders into approximately
22.6 million shares of common stock at a conversion price of $29.205 per share
subject to the adjustments as defined in the Note agreement. The common
shares represented by these Notes were not included in the computation of
diluted earnings per share for the periods presented because the effect of
using the if-converted method would be anti-dilutive. For additional
disclosures regarding the outstanding preferred stock, employee stock options
and the Notes, see the 1997 Form 10-K.
7
Note 3 - Restructuring Activities
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 the Company's 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. During
1997, the Company announced and began to implement supplemental restructuring
actions to meet the foregoing objectives of the plan. The Company recognized a
$217 million charge during 1997 for the estimated incremental costs of those
actions, including approximately $8 million of costs related to the termination
of the Company's former Chief Executive Officer. The combined restructuring
actions consist of terminating approximately 3,600 full-time employees,
approximately 3,300 of whom have been terminated from the second quarter of
1996 through March 27, 1998, 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 $223 million and
noncash asset write-downs of $60 million from the second quarter of 1996
through March 27, 1998. During the third quarter of 1997 and the first and
second quarters of 1998, the Company made adjustments to the categories and
timing of expected restructure spending based on revised estimates. The
Company expects that the remaining $113 million accrued balance as of March
27, 1998 will result in cash expenditures of approximately $71 million over
the next six months and $15 million thereafter. The Company expects that most
of the contemplated restructuring actions related to the plan will be completed
during fiscal 1998 and will be financed through current working capital and,
if necessary, short-term borrowings.
The following table depicts the restructuring activity through March 27, 1998:
(In millions)
Balance as of Balance as of
Category September 26, 1997 Spending Adjustments March 27, 1998
Payments to employees
involuntarily
terminated (C) $ 76 $ 41 $ (1) $ 34
Payments on canceled
or vacated facility
leases (C) 25 5 6 26
Write-down of operating
assets to be sold (N) 39 7 (5) 27
Payments on canceled
contracts (C) 40 14 -- 26
___________________________________________________
$180 $ 67 $ -- $113
(C): Cash; (N): Noncash.
8
Note 4 - Power Computing Asset Acquisition
On January 28, 1998, the Company completed its acquisition of certain assets
of Power Computing Corporation ("PCC"), a licensed distributor of the Mac OS
operating system. In addition to the acquisition of certain assets such as
PCC's customer database and the license to distribute the Mac OS, the Company
has the right to retain certain key employees of PCC. The agreement with PCC
also includes a release of claims between the parties. The total purchase
price was approximately $110 million, of which $75 million was expensed in the
fourth quarter of 1997 as "termination of license agreement" and $35 million
was recorded as goodwill in the second quarter of 1998. The goodwill will be
amortized over three years. The purchase price was comprised of approximately
4.2 million shares of the Company's common stock valued at $80 million,
forgiveness of $28 million of receivables due from PCC, and assumption by the
Company of $2 million of certain customer support liabilities of PCC.
Note 5 - Stock Option Exchange
In order to address concerns regarding the retention of the Company's key
employees, in December 1997 the Board of Directors approved an option exchange
program which allowed employees to exchange all (but not less than all) of
their existing options (vested and unvested) with an exercise price of greater
than $13.6875 on a one-for-one basis for new options with an exercise price of
$13.6875, the fair market value of the Company's common stock on December 19,
1997, and a new four year vesting schedule beginning in December 1997. A
total of 4.4 million options with a weighted-average exercise price of $20.01
per share were exchanged for new options as a result of this program.
Note 6 - Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" which
establishes standards relating to the recognition of all aspects of software
revenue. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997 and may require the Company to modify
certain aspects of its revenue recognition policies. The Company does not
expect the adoption of SOP 97-2 to have a material impact on the Company's
consolidated results of operations.
Note 7 - Contingencies
The Company is subject to various legal proceedings and claims which are
discussed in detail in the 1997 Form 10-K and in the Form 10-Q for the period
ended December 27, 1997. The Company is also subject to certain other legal
proceedings and claims which have arisen in the ordinary course of business
and which have not been fully adjudicated. The results of legal proceedings
cannot be predicted with certainty; however, in the opinion of management, the
Company does not have a potential liability related to any legal proceedings
and claims that would have a material adverse effect on its financial
condition or results of operations.
9
The Internal Revenue Service ("IRS") has proposed federal income tax
deficiencies for the years 1984 through 1991, and the Company has made certain
prepayments thereon. The Company contested the proposed deficiencies by filing
petitions with the United States Tax Court, and most of the issues in dispute
have now been resolved. On June 30, 1997, the IRS proposed income tax
adjustments for the years 1992 through 1994. Although a substantial number of
issues for these years have been resolved, certain issues still remain in
dispute and are being contested by the Company. Management believes that
adequate provision has been made for any adjustments that may result from tax
examinations.
Note 8 - Reclassifications
Certain amounts in the 1997 Condensed Consolidated Statement of Cash Flows
have been reclassified to conform to the 1998 presentation.
Note 9 - Subsequent Events
As of March 27, 1998, the Company owned 37.4% of the outstanding stock of
ARM Holdings plc ("ARM"), a privately held company in the United Kingdom
involved in the design of high performance microprocessors and related
technology. On April 16, 1998, ARM completed an initial public offering of
its stock on the London Stock Exchange and the Nasdaq National Market. The
Company sold 18.9% of its shares in the offering for a gain before foreign
income taxes of approximately $23.4 million. This amount will be recognized
as other income in the third quarter of 1998. Foreign income taxes on this
gain are expected to be approximately $7.25 million. The Company's remaining
investment in ARM will be increased in the third quarter of 1998 by
approximately $16 million to a total of approximately $21 million to reflect
its 25.9% ownership interest in the net book value of ARM following its
initial public offering. The Company will continue to account for its
investment in ARM using the equity method.
The Company's cash and cash equivalents as of March 27, 1998 and September
26, 1997 include $161 million and $165 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. On April 24, 1998, SCI
notified the Company that certain performance measures defined within the
letter of credit agreement had been met by the Company and, that effective as
of May 29, 1998, the letter of credit and the amount pledged as collateral by
the Company to support the letter of credit will be reduced by $100 million.
Should the Company fail to meet those performance measures in the future, it
is possible that some or all of the letter of credit and supporting collateral
would have to be reestablished.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the subsection entitled "Factors That May
Affect Future Results and Financial Condition" below. The following discussion
should be read in conjunction with the condensed consolidated financial
statements and notes thereto included elsewhere in this Form 10-Q and in the
Company's 1997 Form 10-K. All information is based on the Company's
fiscal calendar.
Results of Operations
(Tabular information: Dollars in millions, except per share amounts)
Second Quarter Six Months Ended
March 27, March 28,
1998 1997 Change 1998 1997 Change
______________________ _________________________
Net sales $1,405 $1,601 (12%) $2,983 $3,730 (20%)
Gross margin $ 349 $ 303 15% $ 702 $ 700 --%
Percentage of net sales 25% 19% 24% 19%
Research and development $ 75 $ 141 (47%) $ 154 $ 290 (47%)
Percentage of net sales 5% 9% 5% 8%
Selling, general and
administrative $ 223 $ 348 (36%) $ 457 $ 720 (37%)
Percentage of net sales 16% 22% 15% 19%
Special Charges
In-process research and
development $ -- $ 375 NM $ -- $ 375 NM
Percentage of net sales -- 23% -- 10%
Restructuring costs $ -- $ 155 NM $ -- $ 155 NM
Percentage of net sales -- 10% -- 4%
Interest and other income
(expense), net $ 8 $ 8 --% $ 15 $ 12 25%
Provision for income taxes $ 4 $ -- NM $ 4 $ -- NM
Effective tax rate 6.8% --% 3.8% --%
Net income (loss) $ 55 $ (708) 108% $ 102 $ (828) 112%
Basic earnings (loss)
per share $ 0.42 $(5.64) 107% $ 0.78 $(6.62) 112%
Diluted earnings (loss)
per share $ 0.38 $(5.64) 107% $ 0.71 $(6.62) 111%
11
Results of Operations - continued
(Tabular information: Dollars in millions, except per share amounts)
Second First
Quarter Quarter
1998 1998 Change
______________________
Net sales $1,405 $1,578 (11%)
Gross margin $ 349 $ 353 (1%)
Percentage of net sales 25% 22%
Research and development $ 75 $ 79 (5%)
Percentage of net sales 5% 5%
Selling, general and
administrative $ 223 $ 234 (5%)
Percentage of net sales 16% 15%
Interest and other income
(expense), net $ 8 $ 7 14%
Provision for income taxes $ 4 $ -- NM
Effective tax rate 6.8% --%
Net income (loss) $ 55 $ 47 17%
Basic earnings (loss)
per share $0.42 $0.37 14%
Diluted earnings (loss)
per share $0.38 $0.33 15%
NM: Not Meaningful
12
Net Sales
Net sales represent the Company's gross sales net of returns, rebates and
discounts. Net sales for the second quarter and first six months of 1998 were
$1.4 billion and $3.0 billion, respectively, decreases of 12% and 20%,
respectively, over the corresponding periods in 1997. The decline in net sales
is attributable to several factors. The Company experienced a $60 million
decrease in net sales between the second quarter of 1998 and the same period
in 1997 of certain imaging products the Company is discontinuing. In addition,
between the second quarter of 1998 and the same period in 1997, there was a
$223 million decline in revenues from the sale of PowerBooks due to stronger
than usual sales of PowerBooks in the second quarter of 1997 related to new
product introductions. Net sales in Asia were adversely affected primarily by
the region's current economic problems, declining 31% or $250 million
during the first six months of 1998 compared to the same period in 1997.
Lastly, the average revenue per Macintosh system, a function of total net
sales generated by hardware shipments and total Macintosh CPU unit sales, fell
18% and 5%, respectively, between the second quarter and first six months of
1998 compared to the corresponding periods in 1997 reflecting the effect of
aggressive pricing on the Company's Power Macintosh G3 systems introduced
in 1998, the decline in net sales from the phase out of certain peripheral
products, and the overall industry trend towards lower-priced products. The
effect on net sales of these decreases were partially offset by an 8% increase
in unit sales of Macintosh computer systems during the second quarter of 1998
as compared to the same period in 1997.
Net sales decreased 11% in the second quarter of 1998 compared with the first
quarter of 1998 primarily due to a decrease in the average revenue per
Macintosh system. Also, the second quarter of each fiscal year has
historically been the Company's weakest due to lower demand from its
consumer and education markets in that time frame. Unit sales of peripheral
products decreased 45% in the second quarter of 1998 compared with the prior
quarter reflecting the continuing phase-out of certain peripheral products.
The average revenue per Macintosh system decreased 13% in the second quarter
of 1998 compared with the first quarter of 1998, primarily due to lower priced
G3 Macintosh systems comprising a higher portion of total computer units
shipped, the overall decline in peripheral unit sales, and in response to
continuing industry wide pricing pressures. The effect on net sales of these
decreases was partially offset by a 2% increase in total Macintosh computer
system unit sales during the second quarter of 1998 compared to the prior
quarter. Net sales for the current quarter were also positively affected by
continued strong sales of the Company's Power Macintosh G3 systems, which
accounted for approximately 51%of computer systems shipped during the second
quarter of 1998 as compared to 21% of computer systems shipped during the
prior quarter. In addition, net sales continued to be positively impacted
through the Company's marketing of many of its products directly to end users
in the U.S. through theCompany's on-line store, which opened in November 1997.
The Company generated $16 million in revenue from its on-line store during
the second quarter of 1998.
13
International sales for the three and six month periods in 1998 represented
50% of consolidated net sales in each of the periods versus 49% and 53%,
respectively, for the same periods in 1997. International net sales fell 11%
in the second quarter of 1998 compared with the same period of 1997 primarily
due to decreased revenue in the European and Japanese markets as a result of
significant decreases in the average revenue per Macintosh system and in
peripheral unit sales, partially offset by increases in unit sales of
Macintosh systems. Domestic net sales declined 13% in the second quarter of
1998 over the comparable period of 1997 also due to decreases in the average
revenue per Macintosh system and in peripheral unit sales, partially offset
by increases in unit sales of Macintosh systems
The Company does not currently anticipate significant sequential quarterly
revenue growth before the fourth quarter of fiscal 1998, and year-over-year
revenue growth is not expected before the first quarter of fiscal 1999. The
foregoing statements are forward looking. The Company's actual results could
differ because of several factors, including those set forth below in the
subsection entitled "Factors That May Affect Future Results and Financial
Condition".
Gross Margin
Gross margin increased as a percentage of sales during the second quarter and
the first six months of 1998 compared to the corresponding periods of 1997,
and increased during the second quarter of 1998 from 22% to 25% of sales
compared to the first quarter of 1998. These increases were primarily a result
of a shift in revenue mix towards the Company's higher margin Power Macintosh
G3 systems as well as benefits derived from new distribution channel policies.
The Company believes gross margins of at least 23% are sustainable through
the end of fiscal 1998. The foregoing statement is forward looking. The
Company's actual results could differ because of several factors, including
those set forth below in the subsection entitled "Factors That May Affect
Future Results and Financial Condition".
There can be no assurance that current gross margin levels will be maintained.
In general, gross margins will remain under significant downward pressure due
to a variety of factors, including continued industry wide global pricing
pressures, increased competition, compressed product life cycles, and potential
changes to the Company's product mix. In response to these 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. The Company's operating strategy
and pricing take into account changes in foreign currency exchange rates over
time; however, the Company's results of operations can be significantly
affected in the short term by fluctuations in exchange rates.
14
Research and Development
Expenditures for research and development decreased in amount and as a
percentage of net sales during the second quarter and the first six months of
1998 compared to the corresponding periods of 1997 and decreased in amount
during the second quarter of 1998 compared with the first quarter of 1998.
These reductions are due to various restructuring actions which resulted in
reductions in headcount and cancellation of certain research and development
projects.
Selling, General and Administrative
Selling, general and administrative expenses decreased in amount and as a
percentage of net sales during the second quarter and the first six months of
1998 compared to the corresponding periods of 1997 and decreased in amount
but remained relatively comparable as a percentage of sales during the second
quarter of 1998 compared to the first quarter of 1998. These decreases are due
to various restructuring actions which resulted in reductions in headcount,
the closing of facilities, the write-down of assets, and changes to
distribution channel policies.
Special Charges
During the second quarter of 1997, the Company recognized a $375 million
charge for in-process research and development in connection with the
acquisition of NeXT and a $155 million charge for restructuring costs. For
further information regarding the Company's restructuring actions, see Note 3
to the Condensed Consolidated Financial Statements.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, is comprised of interest income on
the Company's cash and investment balances, interest expense on the Company's
debt, gains and losses recognized on investments accounted for using the
equity method, certain foreign exchange gains and losses and other
miscellaneous income and expense items.
As of March 27, 1998, the Company owned 37.4% of the outstanding stock of
ARM Holdings plc ("ARM"), a privately held company in the United
Kingdom involved in the design of high performance microprocessors and
related technology. On April 16, 1998, ARM completed an initial public
offering of its stock on the London Stock Exchange and the Nasdaq National
Market. The Company sold 18.9% of its shares in the offering for a gain before
foreign income taxes of approximately $23.4 million. This amount will be
recognized as other income in the third quarter of fiscal 1998. The Company
will continue to account for its investment in ARM using the equity method.
15
Provision for Income Taxes
The Company's tax rate was 3.8% for the first six months of 1998. The tax
provision for this period consisted entirely of foreign taxes. The Company
expects to recognize in the third quarter approximately $7.25 million of
foreign income taxes associated with the gain on the sale of ARM shares.
As of March 27, 1998, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $691 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.
As of March 27, 1998, a valuation allowance of $209 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
representing tax loss and credit carryforwards 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 forecasted U.S.
income, including income that may be generated as a result of certain tax
planning strategies, will be sufficient to utilize the tax carryforwards prior
to their expiration in 2011 and 2012 to fully recover this asset. However,
there can be no assurance that the Company will meet its expectations of
future U.S. taxable 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 consolidated financial results. 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.
Liquidity and Capital Resources
The Company's total cash, cash equivalents, and short-term investments
increased to $1,823 million as of March 27, 1998, from $1,459 million as of
September 26, 1997. The Company's cash and cash equivalent balances as of
March 27, 1998 and September 26, 1997 include $161 million and $165
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.
On April 24, 1998, SCI notified the Company that certain performance measures
defined within the letter of credit agreement had been met by the Company and
that effective as of May 29, 1998, the letter of credit and the amount pledged
as collateral by the Company to support the letter of credit will be reduced
by $100 million. Should the Company fail to meet those performance measures
in the future, it is possible that some or all of the letter of credit and
supporting collateral would have to be reestablished.
Cash generated by operations during the first six months of 1998 totaled $296
million. Cash generated by operations was primarily the result of positive
earnings and decreases in accounts receivable and inventories, partially
offset by decreases in accounts payable and other current liabilities and
payments related to restructuring actions.
16
Net cash used for the purchase of property, plant, and equipment totaled $12
million in the first six months of 1998, and consisted primarily of increases
in manufacturing machinery and equipment. The Company expects that the level
of capital expenditures in the second half of 1998 will be consistent with the
first half.
The Company believes that its existing cash, cash equivalents and short-term
investments balances, and ability, if necessary, to effect other short-term
borrowings, will be sufficient to meet its cash requirements over the next
twelve months. Expected cash requirements over the next twelve months include
an estimated $86 million to effect actions under the restructuring plan, most
of which will be effected during 1998. No assurance can be given 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 could be materially adversely affected.
Over the last two years, the Company's debt ratings have been downgraded to
non-investment grade. The company's senior and subordinated long-term debt
ratings remain B- and CCC, respectively, by Standard and Poor's Rating
Agency, and B3 and Caa2, respectively, by Moody's Investor Services. Both
rating agencies continue to have the Company on negative outlook. These
actions may increase the Company's cost of funds in future periods, require
the Company to pledge additional collateral with respect to certain of its
letters of credit and require the Company to agree to more stringent debt
covenants than in the past.
Factors That May Affect Future Results and Financial Condition
The Company operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, there are
many factors that will affect the Company's future results and business which
may cause the actual results to differ from those currently expected. 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 are also dependent upon 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 a favorable financial condition. Potential risks and
uncertainties that could affect the Company's future operating results and
financial condition include, among other things, 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; risks
associated with international operations, including economic and labor
conditions, political instability, tax laws, and currency fluctuations;
17
increasing dependence on third-parties for manufacturing and other outsourced
functions such as logistics; the availability of key components on terms
acceptable to the Company; the continued availability of certain components
essential to the Company's business currently obtained by the Company from
sole or limited sources, including PowerPC RISC microprocessors developed by
and obtained from IBM and Motorola; 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 continue to
make timely delivery of planned enhancements to the current Mac OS and timely
delivery of future versions of the Mac OS; the Company's ability to
successfully integrate the technologies of NeXT Software, Inc. ("NeXT"), which
was acquired in 1997; 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; the availability of third-party
software for particular applications; the effect of year 2000 compliance
issues; the Company's ability to successfully replace its existing transaction
systems in the U.S.; and the impact on the Company's sales, market share and
gross margins as a result of the Company winding down its Mac OS licensing
program.
For a discussion of these and other factors affecting the Company's future
results and financial condition, see "Item 7 - Management's Discussion and
Analysis -- Factors That May Affect Future Results and Financial Condition"
in the Company's 1997 Form 10-K.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various legal proceedings and claims which are
discussed in detail in the 1997 Form 10-K and in the Form 10-Q for the period
ended December 27, 1997. The Company is also subject to certain other legal
proceedings and claims which have arisen in the ordinary course of business
and which have not been fully adjudicated. The results of legal proceedings
cannot be predicted with certainty; however, in the opinion of management, the
Company does not have a potential liability related to any legal proceedings
and claims that would have a material adverse effect on its financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
a) The annual meeting of shareholders was held on April 22, 1998. All
matters voted on were approved except for the proposal to eliminate the
classification of the Board of Directors. That proposal required the
affirmative vote of a majority of the outstanding shares, but only received the
affirmative vote of 39% of the outstanding shares.
b) The following directors were elected at the meeting to serve a two-year
term as Class II directors:
For Authority Withheld
Steven P. Jobs 105,582,626 1,025,548
Lawrence J. Ellison 105,371,740 1,236,434
Edgar S. Woolard, Jr. 105,584,690 1,023,484
The following directors are continuing to serve their two-year terms as
Class I directors which will expire at the next annual meeting:
Gareth C.C. Chang
William V. Campbell
Jerome B. York
c) The other matters voted upon at the meeting and results of those votes
were as follows:
(1) Proposal to amend the Company's Restated Articles of Incorporation
to eliminate the classification of the Board of Directors and thereby
ensure each director will stand for election annually.
For Against Abstained Broker Non-Vote
51,388,074 826,313 402,664 53,991,123
(2) Approval of the Apple Computer, Inc. 1997 Director Stock Option
Plan, which provides for the issuance of up to 400,000 shares of Common
Stock to non-employee directors of the Company upon exercise of stock
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options granted under the stock option plan, and independent stock option
grants of 15,000 stock options to each of Edgar S. Woolard, Jr. and Gareth
C.C. Chang, and the reservation of 430,000 shares of Common Stock in the
aggregate for issuance pursuant to the 1997 Director Stock Option Plan and
such grants.
For Against Abstained Broker Non-Vote
92,932,645 10,804,953 1,130,607 1,739,969
(3) Approval of the 1998 Executive Officer Stock Plan and the reservation
for issuance thereunder of 17,000,000 shares of Common Stock.
For Against Abstained Broker Non-Vote
80,447,299 23,041,431 1,678,638 1,440,806
(4) Ratification of appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for fiscal year 1998.
For Against Abstained Broker Non-Vote
104,210,230 1,884,595 497,668 15,681
The matters numbered (1) - (4) above are described in detail in the
Registrant's definitive proxy statement dated March 16, 1998, for the Annual
Meeting of Shareholders held on April 22, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
10.A.50 1997 Director Stock Option Plan.
10.A.51 1998 Executive Officer Stock Plan
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated January 6, 1998 to
report under Item 5 (other events) the issuance of a press release, and file
such press release as an exhibit to such report, regarding the Company's
expectation of reporting net profits for its fiscal 1998 first quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLE COMPUTER, INC.
(Registrant)
By: /s/Fred D. Anderson
Fred D. Anderson
Executive Vice President and Chief Financial Officer
May 11, 1998
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INDEX TO EXHIBITS
Exhibit
Index
Number Description Page
10.A.50 1997 Director Stock Option Plan. 23
10.A.51 1998 Executive Officer Stock Plan 33
27 Financial Data Schedule. 45
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