________________________________________________________________
			    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,June 27, 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] 	     Identification No.]

                            

           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      [   ]

        
126,354,086127,329,661 shares of Common Stock Issued and Outstanding as of May 2,August 1, 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 SIXNINE MONTHS ENDED MarchJune 27, June 28, March 29, MarchJune 27, June 28, March 29, 1997 1996 1997 1996 Net sales $1,601 $ 2,185 $3,730 $ 5,333$1,737 $2,179 $5,467 $7,512 Costs and expenses: Cost of sales 1,298 2,606 3,030 5,2791,389 1,776 4,419 7,055 Research and development 141 150 290 303101 155 391 458 Selling, general and administrative 348 404 720 845307 364 1,027 1,209 In-process research and development 375- - 375 - Restructuring costs - - 155 207 155 207 2,317 3,367 4,570 6,6341,797 2,295 6,367 8,929 Operating loss (716) (1,182) (840) (1,301)(60) (116) (900) (1,417) Interest and other income, (expense),net 8 7 12 174 65 16 82 Loss before benefit from income taxes (708) (1,175) (828) (1,284)(56) (51) (884) (1,335) Benefit from income taxes - (435)(19) - (475)(494) Net loss $(708) $(740) $(828) $ (809)(56) $ (32) $ (884) $ (841) Loss per common share $(5.64) $(5.99) $(6.62) $(6.55)$(0.44) $(0.26) $ (7.04) $ (6.81) Cash dividends paid per common share $ -- $ -- $ -- $ 0.12.12 Common shares used in the calculations of loss per share (in thousands) 125,609 123,659 125,071 123,326126,500 123,735 125,547 123,463
1 1 APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS ASSETS (In millions)
March 28,June 27, 1997 September 27, 1997(Unaudited) 1996 (Unaudited) Current assets: Cash and cash equivalents $1,273 $1,552$ 1,018 $ 1,552 Short-term investments 186212 193 Accounts receivable, net of allowance for doubtful accountsdoubtfulaccounts of $96$100 ($91 at September 27, 1996) 1,1491,207 1,496 Inventories: Purchased parts 220175 213 Work in process 1923 43 Finished goods 270336 406 509534 662 Deferred tax assets 303307 342 Other current assets 222215 270 Total current assets 3,6423,493 4,515 Property, plant, and equipment: Land and buildings 461460 480 Machinery and equipment 529525 544 Office furniture and equipment 124121 136 Leasehold improvements 181180 188 1,2951,286 1,348 Accumulated depreciation and amortization (739)(746) (750) Net property, plant, and equipment 556540 598 Other assets 289308 251 $4,487$ 4,341 $ 5,364
2 2 APPLE COMPUTER, INC. CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in millions)
March 28,June 27, 1997 September 27, 1997(Unaudited) 1996 (Unaudited) Current liabilities: Notes payable to banks $ 133127 $ 186 Accounts payable 840812 791 Accrued compensation and employee benefits 137115 120 Accrued marketing and distribution 277269 257 Accrued warranty and related 143139 181 Accrued restructuring costs 227167 117 Other current liabilities 254281 351 Total current liabilities 2,0111,910 2,003 Long-term debt 952951 949 Deferred tax liabilities 282284 354 Shareholders' equity: Common stock, no par value; 320,000,000 shares authorized; 126,424,977126,559,143 shares issued and outstanding at March 28,June 27, 1997 (124,496,972 shares at September 27, 1996) 472476 439 Retained earnings 806750 1,634 Other (36)(30) (15) Total shareholders' equity 1,2421,196 2,058 $4,487$ 4,341 $ 5,364
3 4 APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions)
SIXNINE MONTHS ENDED MarchJune 27, 1997 June 28, 1997 March 29, 1996 Cash and cash equivalents, beginning of the period $1,552 $ 756 Operating: Net loss (828) (809)(884) (841) Adjustments to reconcile net loss to cash generated by (used for) operating activities: Depreciation and amortization 55 8877 110 Net book value of property, plant, and equipment retirements 32 240 43 In-process research and development 375 --- Changes in assets and liabilities, net of effect of the acquisition of NeXT: Accounts receivable 356 565297 639 Inventories 153 309128 714 Deferred tax assets 39 (228)35 (150) Other current assets 49 (59)55 (26) Accounts payable 48 (348)20 (403) Accrued restructuring costs 110 18150 159 Other current liabilities (123) 224(133) 119 Deferred tax liabilities (72) (100)(70) (252) Cash generated by (used for) operating activities 194 (175)(10) 112 Investing: Purchases of short-term investments (671)(781) (244) Proceeds from sale of short- termshort-term investments 678 348762 440 Purchases of property, plant and equipment (36) (42) (55) Cash used to acquire NeXT (383)(384) --- Other (17) (42)(32) (33) Cash generated by (used for) investing activities (429) 20(477) 108 Financing: Decrease in notes payable to banks (53) (109)(59) (274) Increase in long-term borrowings 1 -- 646 Increases in common stock, net of related tax benefits and effect of the acquisition of NeXT 8 2212 25 Cash dividends -- (14) Cash used forgenerated by (used for) financing activities (44) (101)(47) 383 Total cash used (279) (256)generated (used) (534) 603 Cash and cash equivalents, end of the period $1,273 $500$1,018 $ 1,359
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"1996 Form 10-K)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 3,5003,100 full-time employees, as adjusted, approximately 2,1002,400 of whom have been terminated from the second quarter of 1996 through March 28,June 27, 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$135 million and noncash asset write-downs of $28$32 million from the second quarter of 1996 through March 28,June 27, 1997. During the third quarter of 1997, the Company made adjustments to the categories and timing of expected restructure spending based on revised estimates. The Company expects that the remaining $227$167 million accrued balance at March 28,June 27, 1997 will result in cash expenditures of approximately $170$100 million over the next twelve months and $11$12 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, if necessary, continued short-term borrowings. 5 The following table depicts the restructuring accrual activity from September 27, 1996 to March 28,June 27, 1997: (In millions)
Category Net Balance at Additions Adjustments Balance at September 27, Net March 28,During During June 27, 1996 AdditionsQ2'97 Spending Q3'97 1997 Payments to employees involuntarily terminated (C) $33 $109 $12 $130$65 $(10) $67 Payments on canceled or vacated facility leases (C) 15 16 5 266 (5) 20 Write-down of operating assets to be sold (N) 47 20 21 4625 13 55 Payments on canceled contracts (C) 22 10 79 2 25 $117 $155 $45 $227$105 $0 $167
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- wideenterprise-wide client/server networks. The total purchase price was $424$425 million, as adjusted, 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$9 million for closing and related costs.costs, as adjusted. 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, overincluding the fair value of the net tangible assets acquiredliabilities assumed, was $422$427 million, as adjusted, of which $375 million was allocated to purchased in-process research and development and $47$52 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 sixnine months ended March 28,June 27, 1997 and March 29,June 28, 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 ofresultof 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 SixNine Months Ended 1997 1996 MarchJune 27,1997 June 28, March 29, 1997 1996 [S] [C] [C] [C] [C] Net sales $1,603 $2,194 $3,747 $5,352$ 5,484 $ 7,544 Net loss $(714) $(1,125) $(843) $(1,204)$ (900) $(1,249) Loss per common share $(5.66) $(8.99) $(6.69) $(9.64)$ (7.14) $ (9.99) 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, dilutedDiluted earnings per share will not differ materially from the replaced fully diluted earnings per share. 5. In July of 1997, the Board of Directors adopted a resolution allowing employees to exchange all (but not less than all) of their existing options (vested and unvested) to purchase Apple common stock (other than options granted by and assumed from NeXT Software, Inc.) for options having an exercise price of $13.25 and a new three year vesting period beginning in July of 1997. 6. 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 the issues for those 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. 7. On August 6, 1997, the Company and Microsoft Corporation ("Microsoft") announced patent cross licensing and technology agreements between the two companies. In addition, Microsoft will purchase 150,000 shares of Apple Series 'A' Non-voting Convertible Preferred Stock ("Preferred Stock") for $150 million. Except under limited circumstances, the shares of Preferred Stock may not be sold by Microsoft prior to August 5, 2000. Upon any sale of the Preferred Stock by Microsoft, the shares will automatically be converted into shares of Apple common stock at a conversion price of $16.50 per share and the shares can be converted at Microsoft's option at such price after August 5, 2000. Each share of Preferred Stock is entitled to receive, if and when declared by the Company's Board of Directors, a dividend of $30 per share per annum, payable in preference to any dividend on the Company's common stock, plus, if the dividends per share paid on the common stock are greater than the dividends pershare paid on the Preferred Stock on an as converted basis, then the Board of Directors shall declare an additional dividend such that the dividends per share paid on the Preferred Stock on an as converted basis, shall equal the dividends per share paid on the common stock. 8. In August 1997, the Board of Directors adopted a resolution to reserve 5 million shares for issuance under a new stock option plan for non-officer employees of the Company. 9. 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 (Tabular information: Dollars in millions, except per share amounts)
Results of Operations SecondThird Quarter Nine Months Ended June 27, June 28, 1997 1996 Change 1997 1996 Change Net sales $ 1,6011,737 $ 2,1852,179 (20%) $ 5,467 $ 7,512 (27%) Gross margin $ 303348 $ (421) NM403 (14%) $ 1,048 $ 457 129% Percentage of net sales 18.9% (19.3%)20.0% 18.5% 19.2% 6.1% Research and development $ 141101 $ 150 (6%155 (35%) $ 391 $ 458 (15%) Percentage of net sales 8.8% 6.9%5.8% 7.1% 7.2% 6.1% Selling, general and administrative $ 348307 $ 404 (14%364 (16%) $ 1,027 $ 1,209 (15%) Percentage of net sales 21.7% 18.5% In-Process17.7% 16.7% 18.8% 16.1% In-process research and development $ --- $ --- $ 375 $ --- NM Percentage of net sales 23.4%--- --- 6.9% --- Restructuring costs $ --- $ --- $ 155 $ 207 NM Percentage of net sales 9.7% 9.5%--- --- 2.8% 2.8% Interest and other income, (expense), net $ 84 $ 7 14%65 (94%) $ 16 $ 82 (80%) Loss before benefit from income taxes $ (56) $ (51) (10%) $ (884) $(1,335) 34% Benefit from income taxes --- (19) NM (494) NM Net loss $ (708)(56) $ (740) (4%(32) (75%) $ (884) $ (841) (5%) Loss per share $(.44) $ (5.64)(.26) (69%) $(7.04) $ (5.99) (6%(6.81) (3%) Six Months Ended March 28, March 29,Third Second Quarter Quarter 1997 19961997 Change Net sales $ 3,7301,737 $ 5,333 (30%)1,601 8% Gross margin $ 700348 $ 54303 15% Percentage of net sales 20.0% 18.9% Research and development $ 101 $ 141 (28%) Percentage of net sales 5.8% 8.8% Selling, general and administrative $ 307 $ 348 (12%) Percentage of net sales 17.7% 21.7% In-process research and development $ --- $ 375 NM Percentage of net sales 18.8% 1.0% Research and development--- 23.4% Restructuring costs $ 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 $ ---155 NM Percentage of net sales 10.1% --- Restructuring costs $ 155 $ 207 NM Percentage of net sales 4.2% 3.9%9.7% Interest and other income, (expense), net $ 124 $ 17 (29%8 (50%) Net loss $ (828)(56) $ (809) (2%)(708) 92% 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(.44) $ (5.64) $ (0.96) (488%)92%
NM: Not meaningful. 8 Overview During the secondthird quarter of 1997 the Company continuedexperienced modest increases in net sales, units shipped and estimated share of the personal computer market compared to experiencethe prior quarter. Despite these modest increases, results of all three quarters of 1997 showed significant declines in net sales, units shipped and the estimated share of the personal computer market. Faced with this continued decline in demand andmarket compared to the resulting continued operating losses, coupled with intense price competition throughoutsame quarters of the industry,prior year. In the third quarter the Company announced and begancontinued to effect supplemental restructuring actions including significant additional headcount reductions,it announced and began in orderthe second quarter. The restructuring actions effected through the end of the third quarter have resulted in a decrease in operating expenses in that quarter compared to reduce coststhe prior quarter and returnthe same quarter of the prior year. Although the Company believes that planned restructuring actions to sustainable profitability. In addition,be effected through the end of the fourth quarter will result in a decrease in operating expenses in that quarter compared to the prior quarter and the same quarter of the prior year, the Company completed its acquisition of NeXT. The Company plansdoes not believe it will return to develop and market a new operating system ("OS") based on its Mac OS and NeXT software technologies.profitability in the fourth quarter. Net Sales Q2Q3 97 compared with Q2Q3 96 Net sales decreased 27%20% in the secondthird quarter of 1997 compared with the same periodquarter of 1996. Total Macintosh computer unit sales and peripheral unit sales decreased 33%17% and 44%27%, respectively, in the secondthird 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%8% in the secondthird 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 MacintoshPowerBook(Registered Trademark) products, partially offset by continued pricing actions, including rebates, across the Performa and othermost product lines in an effort to stimulate demand. The average aggregate revenue per peripheral product increased 22%decreased 25% in the secondthird quarter of 1997 compared with the same period of 1996, as a result of a shift in mix toward the Company's newer and highercertain lower priced products partially offset byand 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%53% of total net sales in the secondthird quarter of 1997 compared with 59%52% in the same period of 1996. International net sales declined 39%19% in the secondthird quarter of 1997 compared with the same period of 1996. Net sales in boththe European markets and in Japan decreased during the secondthird quarter of 1997 compared with the same period inof 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.unit in Japan. Domestic net sales declined 9%22% in the secondthird quarter of 1997, over the comparable period of 1996, due to decreases in unit sales of Macintosh computers and peripheral products and in the average aggregate revenue per peripheral unit, partially offset by increasesan increase in the average aggregate revenue per Macintosh and peripheral unit. According to industry sources, inDuring the secondthird quarter of 1997 compared with the comparable period of 1996, the Company's approximateestimated share of the worldwide and U.S. personal computer markets declined to 3.1%3.7% from 5.8%5.1%, as adjusted, and to 4.0%4.6% from 7.3%6.5%, respectively.as adjusted, respectively, based upon market information provided by industry sources. In addition, the Company believes that its licensees' share of the worldwide personal computer market during such period increased to approximately 0.3%0.4% from approximately 0.1%. 9 SixNine Months Ended March 28,June 27, 1997 compared with SixNine Months Ended March 29,June 28, 1996 Net sales decreased 30%27% in the first sixnine months of 1997 compared with the same period of 1996. Total Macintosh computer unit sales and peripheral unit sales decreased 30%27% and 34%33%, respectively, in the first sixnine 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 primarily during the first six months of 1997 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 and peripheral unit decreased 3%increased slightly in the first sixnine 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 PowerBook products, partiallysubstantially 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 sixnine months of 1997 compared with 54% in the same periodand of 1996. International net sales declined 31%28% in the first sixnine months of 1997 compared with the same period of 1996. Net sales in European markets and Japan decreased during the first sixnine 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%27% in the first sixnine 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 Macintoshperipheral unit, slightly offset by an increase in the average aggregate revenue per peripheralMacintosh unit. Q2Q3 97 compared with Q1Q2 97 Net sales decreased 25%increased 8% in the secondthird quarter of 1997 compared with the firstsecond quarter of 1997. Total Macintosh computer unit sales decreased 35%increased 16% in the secondthird quarter of 1997 compared with the prior quarter primarily as a result of a decline in unit salesthe Company satisfying pent-up demand for certain of Performa andits "Flagship" line of higher-end Power Macintosh products by resolving certain product transition and component constraint issues 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 pressuresexisted 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 saleseasing of pent-up demand for new PowerBook products as a result of new product introductions which satisfied pent-up demand. Power Macintosh unit sales were negatively affected as a result ofintroduced in the Company's inability to fulfill all purchase orders due to the unavailability of sufficient quantities of certain components and product transition constraints.second quarter. Unit sales of peripheral products decreased 38%increased slightly in the secondthird quarter of 1997 compared with the firstsecond quarter of 1997. The average aggregate revenue per Macintosh and peripheral unit increased 14% and 11%, respectively,decreased slightly in the secondthird quarter of 1997 compared with the firstsecond quarter of 1997, primarily due to continued pricing actions, including rebates, across most product lines in an effort to stimulate demand and a shift in product mix away from the Company's higher priced PowerBook products, substantially offset by a shift in product mix toward the Company's newer and higher priced "Flagship" line of Power Macintosh products. 10 International net sales represented 49%53% of total net sales in the secondthird quarter of 1997, compared with 56%49% in the firstsecond quarter of 1997. International net sales decreased 34%increased 18% in the secondthird quarter compared with the firstsecond quarter of 1997. Net sales in European markets and Japan decreased during the second quarter compared with the first quarter of 1997, primarily as a result of decreasesan increase in net sales in Japan due to increases in Macintosh and peripheral unit sales and the average aggregate revenue per Macintosh unit, partiallyslightly offset by an increasedecreases in peripheral unit sales and the average aggregate revenue per peripheral unit. The net sales increase in Japan was slightly offset by a decrease in the European markets. 10 Domestic net sales declined 13%slightly in the secondthird quarter of 1997 compared with the prior quarter, due to decreases in Macintosh and peripheral unit sales, partially offset by increasesa decrease in the average aggregate revenue per Macintosh unit, substantially offset by increases in Macintosh and peripheral unit sales and the average aggregate revenue per peripheral unit. According to industry sources, inDuring the secondthird quarter of 1997 compared with the firstsecond quarter of 1997, the Company's estimated share of the worldwide and U.S. personal computer markets declinedincreased to 3.1%3.7% from 4.3%3.2%, as adjusted, and to 4.0%4.6% from 5.2%4.2%, respectively.as adjusted, respectively, based upon market information provided by industry sources. In addition, the Company believes that its licensees' share of the worldwide personal computer market decreasedduring such period increased to approximately 0.3%0.4% from approximately 0.5%0.3%. In general, the Company's resellers purchase products on an as-neededas- 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 $293 million at August 1, 1997, from 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 backlogfor the Company's "Flagship" line of Power Macintosh product due to the Company's inability to fulfill all purchase orders,products 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 fourthfirst quarter of 1997,1998, 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 from 18.5% to 20.0% of sales during the third quarter of 1997 compared to the same period of 1996, primarily as a result of an increase in the gross margin percentage on the sale of the Company's PowerBook products and a shift in mix towards these products which yield a high gross margin per unit, as well as an increase in the gross margin percentage on the sale of the Company's "Value" line of Power Macintosh products (formerly generally referred to as entry level and Performa(Registered Trademark) products). Gross margin increased from 6.1% to 19.2% of sales in the second quarter andduring the first sixnine months of 1997 respectively, when compared withto the corresponding periodssame period of 1996, primarily as a result of a $616 million charge in the second quarter of 1996 11 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"Value" line of Power Macintosh 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 andof the "Value" line of Power Macintosh products, as well as 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 percentageincreased from 18.9% to 20.0% of sales induring the secondthird quarter of 1997 compared with the firstsecond quarter of 1997, primarily due toas a result of an increase in the gross margin percentage on the sale of the Company's "Flagship" line of Power Macintosh products and a shift in mix toward higher priced and highertowards these products which yield a high gross margin PowerBookper unit, as well as an increase in the gross margin percentage on the sale of the Company's "Value" line of Power Macintosh products, offset in part by continued pricing actions, including rebates, across the Performa and other product linesa reduced mix in an effort to stimulate demand.PowerBook products. The gross margin levels in the secondthird quarter of 1997 compared with the firstsecond quarter of 1997 and the secondthird quarter of 1996, and in the first 6nine 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,currencies. This negative impact was 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 secondthird quarter and in the first sixnine 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. 12
Research and Development SecondThird Quarter Nine Months Ended June 27, June 28, 1997 1996 Change 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 $ 290101 $ 303 (4%155 (35%) $ 391 $ 458 (15%) Percentage of net sales 7.8% 5.7%5.8% 7.1% 7.2% 6.1% Third Second First Quarter Quarter 1997 1997 Change Research and development $ 101 $ 141 $ 149 (5%(28%) Percentage of net sales 5.8% 8.8% 7.0%
12 Research and development expenditures decreased slightly in amount in the secondthird quarter of 1997 compared with the firstsecond quarter of 1997 and the secondthird quarter of 1996, and during the first sixnine months of 1997 compared with the same period of 1996. The decreases are primarily due to certain restructuring actions initiated by the Company late in the second quarter of 1997. Research and development expenditures also decreased as a percentage of sales in the third quarter of 1997 compared with the second quarter of 1997 and the third quarter of 1996, primarily due to the impact of such restructuring actions, partially offset by a decrease in the level of net sales. The increase as a percentage of net sales for the first nine months of 1997 compared with the same period of 1996 primarily due to reduced expenditures asresulted from a result of the Company initiating certain restructuring actions latedecrease in the second quarter of 1997. The increases as a percentagelevel of net sales, resulted from decreases inpartially offset by the levelsimpact of net sales.such restructuring actions. 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 slightly in the third and fourth quartersquarter of 1997 compared with the same periods of the prior year and compared with the secondthird 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. 13
In-Process Research and Development SecondThird Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 In-Process 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%6.9% --- Third Second First Quarter Quarter 1997 1997 Change In-ProcessIn-process research and development $ 375--- $ ---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. 1314
Selling, General and Administrative SecondThird Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 Selling, general and administrative $ 348307 $ 404 (14%364 (16%) Percentage of net sales 21.7% 18.5% Six Months Ended March 28, March 29, 1997 1996 Change Selling, general and administrative $ 7201,027 $ 8451,209 (15%) Percentage of net sales 19.3% 15.8%17.7% 16.7% 18.8% 16.1% Third Second First Quarter Quarter 1997 1997 Change Selling, general and administrative $ 307 $ 348 $ 372 (6%(12%) Percentage of net sales 17.7% 21.7% 17.5%
Selling, general and administrative expensesexpenditures decreased in amount in the secondthird quarter of 1997 compared with the firstsecond quarter of 1997 and the secondthird quarter of 1996, and during the first sixnine months of 1997 compared with the same period of 1996,1996. The decreases are primarily due to reduced expenditures as a resultcertain restructuring actions initiated by the Company late in the second quarter of actions taken under the Company's restructuring plan. In addition, selling,1997. Selling, general and administrative expensesexpenditures also decreased in amountas a percentage of sales in the secondthird quarter of 1997 compared with the firstsecond quarter of 1997 and the third quarter of 1996, primarily due to the higherimpact of such restructuring actions partially offset by a decrease in the level of advertising and marketing expenditures incurred during the first quarter for the holiday buying season.net sales. The increasesincrease as a percentage of net sales for the first nine months 1997 compared with the same period of 1996 resulted from decreasesa decrease in the levelslevel of net sales.sales, partially offset by the impact of such restructuring actions. The Company believes its selling, general and administrative expenditures will significantlycontinue to decrease in the third and fourth quartersquarter of 1997 compared with the same quarters of the prior year and compared with the secondthird 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. 1415
Restructuring Costs SecondThird Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 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%--- --- 2.8% 2.8% Third Second First Quarter Quarter 1997 1997 Change Restructuring costs $ 155--- $ ---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 SecondThird Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 Interest and other income(expense),income, net $ 84 $ 7 14% Six Months Ended March 28, March 29, 1997 1996 Change Interest and other income(expense), net65 (94%) $ 1216 $ 17 (29%82 (80%) Third Second First Quarter Quarter 1997 1997 Change Interest and other income(expense),income, net $ 4 $ 8 $ 4 100%(50%)
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 third quarter of 1997 and for the first sixnine months of 1997 compared with the same periodperiods of 1996, primarily due to $69 million of realized gains on sales of available-for-sale securities realized in the third quarter of 1996. Interest and other income, net, decreased in the third quarter of 1997 compared with the second quarter of 1997 as a result of lower foreign currency gains, partially offset by greater interest income. 15 average cash balances, due to cash used to acquire NeXT, to fund the restructuring actions begun in the second quarter of 1997 and to fund operations. The Company expects interest income to decreasebe flat in the third and fourth quartersquarter of 1997 compared with the immediate prior quarters, due to lower cash balances as a result of cash used to acquire NeXT, fundquarter. 16 The Company's senior and subordinated long-term debt ratings remain unchanged from the restructuring actions over primarily the next two quarters, and fund operations over at least the nextsecond 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) SecondBenefit Third Quarter Nine Months Ended 1997 1996 Change June 27, June 28, Change 1997 1996 Provision (benefit) for Benefit from income taxes -- $ (435)(19) NM -- $ (494) 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% Third Second First Quarter Quarter 1997 1997 Change Provision (benefit) forBenefit from income taxes -- -- NM Effective tax rate -- --
NM: Not meaningful. At March 28,June 27, 1997, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $651$591 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 sixnine months of 1997, a valuation allowance of $199$174 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.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. 1617 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 a favorable 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 availability of key components on terms acceptable to 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 continue to make timely delivery of planned enhancements to the current Macintosh operating system ("Mac(R)Mac(Registered Trademark) 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;employees, including a new Chief Executive Officer; the effects of significant adverse publicity; and the availability of third- partythird-party software for particular applications. The Company expects that it will not return to profitability until at leastin the fourth quarter of 1997, if not later.1997. 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 and modifying 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. Also, the new business model now includes the "spin-out" of the Company's Newton(Registered Trademark) unit into a 18 separate but wholly-owned subsidiary named Newton, Inc. There can be no assurance that Newton, Inc. will be successful as a separate entity. 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, althoughAlthough the Company believes that the actions it is taking and will take under its new business model, including its restructuring plan, and its acquisition of NeXT, and its "spin-out" of Newton, Inc., should help restore marketplace confidence in the Macintosh platform,Company, 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.products, and the introduction of Mac OS 8 in July of 1997. 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.segments and to the extent new product introductions are in markets that are new to the Company. 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 19 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 recentlyhas announced a "dual track" approach to its OS development.plans for two operating systems. The Company plans to continue to introduce enhancementsmajor upgrades 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 OSon Apple 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, or those expected to be included in Windows 98, have added features to the Windows platform which make the differences between the Mac OS and Microsoft's Windows 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. 20 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 thatsystem, many of which have licensing arrangements with 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, asCompany. As a result of licensing its operating system, the Company competes with other companies producing Mac OS-basedOS- 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. The Company is currently in discussions concerning the nature of such licensing arrangements going forward, including whether or not to extend such arrangements. There can be no assurance that the Company's Mac OS licensing strategy will prove successful or will financially benefit the Company or, if the Company decides to alter its strategy, that it will be able to modify its existing licensing arrangements to pursue such a strategy. As a supplemental means of addressing the competition from MS-DOSMS- 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)PowerPC(TradeMark) microprocessor and either include the Pentium or 586-class microprocessor or can accommodate an add-on card containing a Pentium or 586-class microprocessor. These products enable users to run concurrently applications that require the Mac OS, MS-DOS, Windows 3.1, or Windows 95 operating systems. Depending on customer demand, theThe Company may supplyhas supplied customers who purchase Cross-Platform Products with Windows operating system software under licensing agreements with Microsoft. However, in ordercertain Microsoft distributors. The Company's ability to do so,market Cross-Platform Products could be adversely affected if such Microsoft distributors were unwilling to continue to supply the Company will need to enter into one or more agreements with certain Microsoft distributors.Windows operating system software on the terms of such licensing agreements. The Company, International Business Machines Corporation ("IBM") and Motorola, Inc. ("Motorola") 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 Corporation ("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. Several competitors of the Company 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. On August 6, 1997, the Company and Microsoft announced patent cross licensing and technology agreements between the two companies. Under these agreements, the companies provided patent cross licenses to each other. In addition, Microsoft will make future versions of its Microsoft Office and Internet Explorer products for the Mac OS, and the Company will bundle the Internet Explorer product with Mac OS system software releases and make that product the default internet browser for such releases. The Company also announced that Microsoft will purchase 150,000 shares of Apple Series 'A' Non-voting Convertible Preferred Stock for $150 million. While the Company believes that its relationship with Microsoft will be beneficial to the Company and to its efforts to increase the installed base for the Mac OS, the Microsoft relationship is for a limited term and does not cover many of the areas in which the Company competes with Microsoft, including the Windows platform. In addition, the Microsoft relationship may have an adverse effect on, but not limited to, the Company's relationship with other partners. There can be no assurance that the benefits to the Company of the Microsoft relationship will not be offset by the disadvantages. 21 Support from Third-Party Software Developers 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. Although the Company has entered into a relationship with Microsoft, which includes Microsoft's agreement to develop and ship future versions of its Microsoft Office and Internet Explorer products and certain other Microsoft tools for the Mac OS, such relationship is for a limited term and does not cover many areas in which theCompany competes with Microsoft. Accordingly, Microsoft's interest in producing applicationproducingapplication software for the Company's products not covered by the relationship or upon expiration of the relationship 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.system. 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 risks associated with international factors, such asactivities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries), and changes in foreignthe value of the United States dollar versus the local currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products.products are sold. 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- baseddollar-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 22 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- relatedrate-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,canceled, 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 affecteffect 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 resultpart of the Company'sits restructuring actions, which include the sale of the Company'sCompany has sold its Fountain, Colorado, manufacturing facility to SCI Systems, Inc. ("SCI") and entered into a related manufacturing outsourcing agreement with SCI, both inSCI; sold its Singapore printed circuit board manufacturing assets to NatSteel Electronics Pte., Ltd. who will then supply main logic boards to the second quarterCompany under a manufacturing outsourcing agreement; entered into an agreement with Ryder Integrated Logistics, Inc. to outsource the Company's domestic operations transportation and logistics management, and has entered into other similar 23 agreements to outsource the Company's European operations transportation and logistics management. As a result of 1996,the foregoing actions, the proportion of the Company's products produced and distributed under outsourcing arrangements will continue to 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 cancelationcancellation 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. TheAlthough certain raw materials, processes and components essential to the Company's ability to satisfy demand for its products may be limitedbusiness are generally available from multiple sources, other processes and key components (including microprocessors and application specific integrated circuits ("ASICs") ) are currently obtained by the availabilityCompany from single sources. If the supply of a key components.single-sourced material, process or component were to be delayed or curtailed, the Company's business and financial performance could be adversely affected, depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternate source. The Company believes that the availability from suppliers to the personal computer industry of microprocessors and ASICSASICs 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. The Company's ability to produce and market competitive products is also dependent on the ability and desire of IBM and Motorola, the suppliers of the PowerPC RISC microprocessor for certain of the Company's products, to supply to the Company in adequate numbers microprocessors that produce superior price/performance results compared with those supplied to the Company's competitors by Intel Corporation, the developer and producer of the microprocessors used by most personal computers using the MS-DOS and Windows operating systems. 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. The Company's current financial condition and uncertainties related to recent events could effect the terms on which suppliers are willing to supply the Company with their products. There can be no assurance that the Company's current suppliers will continue to supply the Company on terms acceptable to the Company or that the Company will be able to obtain comparable products from alternate sources on such terms. The Company's future operating results and financial condition could be adversely affected if the Company is unable 24 to continue to obtain key components on terms substantially similar to those currently available to the Company. 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. Change in Senior Management On July 9, 1997, the Company announced that Dr. Gilbert F. Amelio had resigned his positions as Chairman of the Board and Chief Executive Officer and that the Company was initiating a search for a new Chief Executive Officer. While the Company intends to name a new Chief Executive Officer as soon as practicable, there can be no assurance that the change in senior management and related uncertainties will not adversely affect the Company's operating results and financial condition during the period until a new Chief Executive Officer is hired and afterward. Changes to Board of Directors The Company announced on August 6, 1997 significant changes to its Board of Directors, replacing all but two former directors. The continuing directors are Gareth Chang and Edgar Woolard. The new directors are William Campbell, President and CEO of Intuit Corp.; Lawrence Ellison, Chairman and CEO of Oracle Corp.; Steve Jobs, Chairman and CEO of Pixar Animation Studios; and Jerome York, former CFO of IBM and Chrysler Corporation. 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 allrecently evaluated replacing its existing transaction systems (which include order management, product procurement, distribution, and finance) with a single integrated system, as part ofbut has decided to continue 25 to use its ongoing effort to increase operational efficiency.existing transaction systems for the foreseeable future. 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$1,103 million at March 28,June 27, 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$1,230 million at March 28,June 27, 1997, from $1,745 million at September 27, 1996. The Company's cash and cash equivalent balance at March 28,June 27, 1997 and September 27, 1996, includes $167$176 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 generatedused by operations during the first sixnine months of 1997 totaled $194$10 million, primarily due to the result ofCompany's net loss, adjusted for non-cash expenses such as in-process research and development, and a decrease in certain current liabilities, as well as restructuring costs, partially offset by 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.inventories. 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$384 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$42 million in the first sixnine 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. InThe Company's debt ratings remain unchanged from the second quarter of 1997, when 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 withincluding proceeds from the August 1997 sale of Apple Series A Non-voting Convertible Preferred Stock to Microsoft, and 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$100 million to effect actions under the restructuring plan, most of which will be effected over the next two quarters.six months. Also, the notes payable to banks all become due prior to July 1,September 30, 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 ("IRS") has proposed federal income tax deficiencies for the years 26 1984 through 1991, and the Company has made certain prepayments thereon. The Company contested the proposed deficiencies forby filing petitions with the years 1984 through 1988,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 the issues for these years have been resolved. On June 29, 1995,resolved, certain issues still remain in dispute and are being contested by 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.Company. Management believes that adequate provision has been made for any adjustments that may result from these tax examinations. 2527 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 FebruaryJuly 1997, the Court in the case styled Abraham and Evelyn Kostick Trust v. Peter Crisp et. al. sustainedgranted in part and denied in part 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 FebruaryThe Court had previously sustained the demurrer to plaintiffs' class claims but overruled the demurrer to the shareholder derivative claims. The Company intends to make additional motions to dispose of the case on the pleadings, including filing a demurrer to any amended complaint that plaintiffs may elect to serve. On July 8, 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 ansustained the Company's demurrer dismissing the amended complaint expanding the class period from April 4, 1995with leave to January 15,amend. On July 28, 1997, and adding several current and former officers of the Company as defendants. The Company intends to fileplaintiff served a demurrer seeking dismissal of thesecond amended complaint. In March 1997, the courtCourt 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 arewould be parties and provisionally certified a nationwide settlement class with respect thereto. A hearing regarding final approval of the proposed settlement is scheduled forwas held on June 30, 1997.1997 and the Court's decision is pending. 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. In June 1997, the Federal Trade Commission and the Company agreed to a consent decree regarding the Company's past processor upgrade practices. The terms of this decree would include an upgrade offer to customers and an agreement to some terms about future activities by the Company. The consent decree is pending court approval. 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. 2628 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.3-210.A.26-1 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, 1996May 1, 1997, 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 EmploymentF Amelio 10.A.45 Retention Agreement dated as of February 28, 1996May 1, 1997, between Apple Computer, Inc. and Dr. Gilbert F. Amelio".Fred D. Anderson 27 Financial Data Schedule. (b) Reports on Form 8-K Current reports on Form 8-K, dated April 10, 1997 and April 25, 1997, respectively, were filed by Registrant with the Securities and Exchange Commission to report under Item 5 thereof the press releases issued to the public on March 14, 1997 regarding the Registrant's restructuring plan and expected second quarter revenue and the press release issued to the public on April 16, 1997 regarding the Registrant's second quarter results. 29 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,August 11, 1997 2830 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.3-210.A.26-1 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, 1996May 1,1997, between Apple Computer, Inc. and Dr. Gilbert F. Amelio. 27 10.A.42 Senior Officers Restricted Performance Share Plan, as amended through March 25,32 10.A.45 Retention Agreement dated May 1, 1997, 49 10.A.43 (1) NeXTbetween Apple Computer, Inc. 1990 Stock Option Plan, as amended. 27 10.A.44 Non-Employee Director Stock Plan 58and Fred D. Anderson. 34 27 Financial Data Schedule. 70 (1) Incorporated by reference at page indicated. 29 47