UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.D.C. 20549
___________
Form 10-Q
___________
(Mark One)
[X] Quarterly report pursuant to Section_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of
the Securities Exchange Act ofOF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27,December 26, 1997 OR
[ ] Transition report pursuant to SectionTRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) of
the Securities Exchange Act ofOF 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
[State942404110
(State or other jurisdiction [I.R.S.(I.R.S. Employer Identification No.)
of incorporation or organization] Identification No.]organization)
1 Infinite Loop 95014
Cupertino, California
95014
[Address(Address of principal executive offices] [Zip Code]offices) (Zip Code)
Registrant's telephone number, including area code: (408) 996-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Share Purchase Rights
(Titles of classes)
___________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]X No [ ]
127,329,661____
132,768,062 shares of Common Stock Issued and Outstanding as of AugustJanuary 30, 1998
1 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in millions, except per share amounts)
THREE MONTHS ENDED
NINE MONTHS ENDED
JuneDecember 26, 1997 December 27, June 28, June 27, June 28,
1997 1996 1997 1996
Net sales $1,737 $2,179 $5,467 $7,512$ 1,578 $ 2,129
Costs and expenses:
Cost of sales 1,389 1,776 4,419 7,0551,225 1,732
Research and development 101 155 391 45879 149
Selling, general and administrative 307 364 1,027 1,209
In-process research and development - - 375 -
Restructuring costs - - 155 207
1,797 2,295 6,367 8,929234 372
1,538 2,253
Operating loss (60) (116) (900) (1,417)income (loss) 40 (124)
Interest and other income (expense), net 7 4
65 16 82
LossIncome (loss) before benefit fromprovision (benefit)
for income taxes (56) (51) (884) (1,335)
Benefit from47 (120)
Provision (benefit) for income taxes - (19) - (494)-- --
Net lossincome (loss) $ (56)47 $ (32) $ (884) $ (841)
Loss(120)
Basic earnings (loss) per common share $(0.44) $(0.26) $ (7.04) $ (6.81)
Cash dividends paid per common share $ --0.37 $ --(0.96)
Diluted earnings (loss) per share $ --0.33 $ .12(0.96)
Common shares used in the calculations
of lossbasic earnings (loss) per share (in
thousands) 126,500 123,735 125,547 123,463127,989 124,532
Common and common equivalent shares
used in the calculations of diluted
earnings (loss) per share (in thousands) 139,839 124,532
1See accompanying notes to condensed consolidated financial statements
(unaudited).
2
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
June 27,December 26, 1997 September 27,26, 1997
(Unaudited) 1996
Current assets:
Cash and cash equivalents $ 1,0181,193 $ 1,5521,230
Short-term investments 212 193434 229
Accounts receivable, net of allowance
for doubtfulaccountsdoubtful accounts of $100$96 ($9199 at
September 27, 1996) 1,207 1,49626, 1997) 902 1,035
Inventories:
Purchased parts 175 21399 141
Work in process 23 435 15
Finished goods 336 406
534 662300 281
404 437
Deferred tax assets 307 342233 259
Other current assets 215 270207 234
Total current assets 3,493 4,5153,373 3,424
Property, plant, and equipment:
Land and buildings 460 480402 453
Machinery and equipment 525 544416 460
Office furniture and equipment 121 136100 110
Leasehold improvements 180 188
1,286 1,348151 172
1,069 1,195
Accumulated depreciation and amortization (746) (750)(640) (709)
Net property, plant, and equipment 540 598429 486
Other assets 308 251324 323
$ 4,3414,126 $ 5,3644,233
2See accompanying notes to condensed consolidated financial statements
(unaudited).
3
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
June 27,December 26, 1997 September 27,26, 1997
(Unaudited) 1996
Current liabilities:
Notes payable to banks $ 12724 $ 18625
Accounts payable 812 791655 685
Accrued compensation and employee benefits 115 12092 99
Accrued marketing and distribution 269 257261 278
Accrued warranty and related 139 181126 128
Accrued restructuring costs 167 117144 180
Other current liabilities 281 351367 423
Total current liabilities 1,910 2,0031,669 1,818
Long-term debt 952 951 949
Deferred tax liabilities 284 354261 264
Commitments and contingencies
Shareholders' equity:
Series A non-voting convertible preferred
stock, no par value; 150,000 shares
authorized, issued and outstanding 150 150
Common stock, no par value; 320,000,000
shares authorized; 126,559,143128,018,985 shares
issued and outstanding at June 27,December 26,
1997 (124,496,972(127,949,220 shares at September
27, 1996) 476 43926, 1997) 499 498
Retained earnings 750 1,634636 589
Other (30) (15)(41) (37)
Total shareholders' equity 1,196 2,0581,244 1,200
$ 4,3414,126 $ 5,3644,233
3See accompanying notes to condensed consolidated financial statements
(unaudited).
4
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In(Dollars in millions)
NINETHREE MONTHS ENDED
JuneDecember 26, 1997 December 27, 1997 June 28, 1996
Cash and cash equivalents, beginning
of the period $1,552 $ 7561,230 $ 1,552
Operating:
Net loss (884) (841)income (loss) 47 (120)
Adjustments to reconcile net lossincome
(loss) to cash generated by (used for) operating
activities:
Depreciation and amortization 77 11028 25
Changes in operating assets and liabilities:
Accounts receivable 133 4
Inventories 33 174
Deferred tax assets 26 18
Other current assets 27 (38)
Accounts payable (30) 29
Accrued restructuring costs (36) (12)
Other current liabilities (82) 30
Deferred tax liabilities (3) (18)
Cash generated by operating activities 143 92
Investing:
Purchase of short-term investments (399) (542)
Proceeds from sales and maturities of
short-term investments 194 102
Net book valueproceeds from sale of property,
plant, and equipment retirements 40 43
In-process research and development 375 ---
Changes in assets and liabilities, net of
effect of the acquisition of NeXT:
Accounts receivable 297 639
Inventories 128 714
Deferred tax assets 35 (150)
Other current assets 55 (26)
Accounts payable 20 (403)
Accrued restructuring costs 50 159
Other current liabilities (133) 119
Deferred tax liabilities (70) (252)
Cash generated by (used for) operating
activities (10) 112
Investing:
Purchases of short-term investments (781) (244)
Proceeds from sale of short-term investments 762 440
Purchases45 2
Purchase of property, plant, and equipment (42) (55)(7) (20)
Other (14) (10)
Cash used to acquire NeXT (384) ---
Other (32) (33)
Cash generated by (used for)for investing activities (477) 108(181) (468)
Financing:
DecreaseIncrease (decrease) in notes payable to banks (59) (274)(1) (6)
Increase (decrease) in long-term borrowings -- 6461 1
Increases in common stock, net of related
tax benefits and effect of the acquisition of NeXT 12 25
Cash dividends -- (14)1 3
Cash generated by (used for)
financing activities (47) 3831 (2)
Total cash generated (used) (534) 603used (37) (378)
Cash and cash equivalents, end of the period $1,018 $ 1,3591,193 $ 1,174
Supplemental cash flow disclosures:
Cash paid during the quarter for interest $ 20 $ 20
Cash paid(received) during the quarter
for income taxes, net $ (18) $ 20
4See accompanying notes to condensed consolidated financial statements
(unaudited).
5
APPLE COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Condensed 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 Condensed 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, 1996,26, 1997, included in its Annual Report on Form 10-K for the
year ended September 27, 199626, 1997 (the "1996"1997 Form 10-K").
2. The Company has adopted Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings Per Share". In accordance with SFAS 128,
primary earnings per share have been replaced with basic earnings per share,
and fully diluted earnings per share have been replaced with diluted earnings
per share which includes potentially dilutive securities such as outstanding
options and convertible securities. Prior periods have been presented to
conform to SFAS 128, however, as the Company had a net loss in the prior
period, basic and diluted loss per share are the same as the primary
loss per share previously presented.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding during the period increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of outstanding
options is reflected in diluted earnings per share by application of the
treasury stock method. The dilutive effect of convertible securities is
reflected using the if-converted method. The following table sets forth the
computation of basic and diluted earnings per share (in thousands, except net
income (loss) and per share amounts):
For the Quarter ended For the Quarter ended
December 27, 1997 December 27, 1996
Numerator:
Net income (loss) $ 47 $ (120)
Denominator:
Denominator for basic earnings
(loss) per share -- weighted
average shares outstanding 127,989 124,532
Effect of Dilutive Securities:
Convertible preferred stock 9,091 --
Dilutive options outstanding 2,759 --
Dilutive potential common shares 11,850 --
Denominator for diluted
earnings per share -- adjusted
weighted-average shares and
assumed conversions 139,839 124,532
Basic earnings (loss) per share $ 0.37 $ (0.96)
Diluted earnings (loss) per share $ 0.33 $ (0.96)
6
For purposes of calculating diluted earnings per share for the first quarter
of 1998, the Company assumed that all employees exchanged their existing
options (See Note 5 to the Condensed Consolidated Financial Statements) for
new options with an exercise price of $13.6875 effective December 15, 1998.
Therefore, all options outstanding as of December 26, 1997, were included in
the computation of diluted earnings per share as they were all considered to
have exercise prices less than $18.05, the average market price of common
shares during the first quarter of 1998. However, the effect on dilutive
earnings per share of approximately 8.5 million of the outstanding options was
weighted to reflect that they were only considered outstanding and dilutive
options from December 19, 1997, the date of the Company's option exchange
offer to its employees, through the end of the quarter. The Company has
outstanding $661 million of unsecured convertible subordinated notes (the
"Notes") which are convertible by their holders into approximately 22.6
million shares of common stock at a conversion price of $29.205 per share
subject to the adjustments as defined in the Note agreement. The common
shares represented by these Notes were not included in the computation of
diluted earnings per share because the effect of using the if-converted method
would be anti-dilutive. For additional disclosures regarding the outstanding
preferred stock, employee stock options and the Notes, see the 1997 Form 10-K.
3. 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 Companythe Company's products and the
Company's adoption of a new strategic direction. These actions resulted in a
net charge of $179 million after subsequent adjustments recorded in the fourth
quarter of 1996. In the second
quarter ofDuring 1997, the Company announced and began to
implement supplemental restructuring actions to meet the foregoing objectives
of the plan. The Company recognized a $155$217 million charge in the
second quarterduring 1997 for
the estimated incremental costs of those actions.actions, including approximately $8
million of costs related to the termination of the Company's former Chief
Executive Officer. The combined restructuring actions consist of terminating
approximately 3,1003,600 full-time employees, as adjusted, approximately 2,4003,000 of whom have
been terminated from the second quarter of 1996 through June 27,December 26, 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 $135$195
million and noncash asset write-downs of $32$57 million from the second quarter
of 1996 through June 27,December 26, 1997. During the third quarter of 1997
and the first quarter of 1998, the Company made adjustments to the categories
and timing of expected restructure spending based on revised estimates. The
Company expects that the remaining $167$144 million accrued balance at June 27,as of
December 26, 1997 will result in cash expenditures of approximately $100$102
million over the next twelve months and $12$10 million thereafter. The
Company expects that most of the contemplated restructuring actions related to
the plan will be completed within the next six monthsduring fiscal 1998 and will be financed through
current working capital and, if necessary, continued short-term borrowings.
57
The following table depicts the restructuring accrual activity from
September 27, 1996 to June 27,through
December 26, 1997:
(In millions)
Category Net
Balance at Additionsas of Spending Adjustments Balance atas
September 27, During During June 27,
1996 Q2'97 Spending Q3'97of December
26, 1997 Q1'98 Q1'98 26, 1997
Payments to employees
involuntarily terminated
(C) $33 $109 $65 $(10) $67$ 76 $ 23 $ 1 $ 54
Payments on canceled or
vacated facility leases (C) 15 16 6 (5) 2025 2 3 26
Write-down of operating
assets to be sold (N) 47 20 25 13 5539 4 (3) 32
Payments on canceled
contracts (C) 22 10 9 2 25
$117 $155 $105 $0 $16740 7 (1) 32
$180 $ 36 $ -- $144
C:(C): Cash; N: Noncash
3. On February 4,(N): Noncash.
4. In August 1997, the Company acquired allagreed to acquire certain assets of
Power Computing Corporation ("PCC"), a company which Apple had licensed
to distribute the outstanding sharesMac OS operating system. In addition to the acquisition of
NeXT Software, Inc. ("NeXT"). NeXT, headquartered in Redwood City,
California, had developed, marketedcertain assets such as PCC's customer database and supported software that enables
customersthe license to
easily and quickly implement business applications ondistribute the Internet/World Wide Web, intranets and enterprise-wide client/server networks.Mac OS, the Company has the right to retain certain key
employees of PCC. The agreement with PCC also includes a release of claims
between the parties.
On January 28, 1998, the Company completed its acquisition of
certain assets of PCC. The total purchase price was $425approximately $115
million, as adjusted, and was comprised of
cash payments of $319 million and the issuance of 1.5 millionwhich included 4,159,000 shares of the Company's common stock
to the NeXT shareholders valued at approximately $25$80 million, according to the terms of the purchase agreement; the issuanceforgiveness of approximately 1.8$28 million options to purchaseof
receivables due from PCC, assumption by the Company's common stock to the
NeXT optionholders valued at approximately $16 million based on theCompany of certain
customer support liabilities of PCC, and closing and related costs. The
difference between the exercisetotal purchase price of the options and the market value$75 million expensed as
"Termination of License Agreement" in the fourth quarter of 1997 will be
capitalized in the second quarter of 1998 and then amortized over a period of
three years.
5. In order to address concerns regarding the retention 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 $9 million for closing and related
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 includedkey employees, in the Company's consolidated operating
results. The purchase price, including the fair value of the net tangible
liabilities assumed, was $427 million, as adjusted, of which $375 million was
allocated to purchased in-process research and development and $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 nine months ended June 27, 1997 and 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
resultof 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) Nine Months Ended
June 27,1997 June 28, 1996
[S] [C] [C]
Net sales $ 5,484 $ 7,544
Net loss $ (900) $(1,249)
Loss per common share $ (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. Diluted 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 allowingapproved an option
exchange program which permits 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 havingwith an exercise price of
$13.25greater than $13.6875 on a one-for-one basis for new options with an exercise
price of $13.6875, the fair market value of the Company's common stock on
December 19, 1997, and a new threefour year vesting periodschedule beginning in
JulyDecember 1997.
6. In October 1997, the American Institute of 1997.
6.Certified Public
Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition." SOP 97-2 establishes standards relating to the recognition of all
aspects of software revenue. SOP 97-2 is effective for transactions entered
into in fiscal years beginning after December 15, 1997 and may require the
Company to modify certain aspects of its revenue recognition policies. The
Company does not expect the adoption of SOP 97-2 to have a material impact
on the Company's consolidated results of operations.
7. 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 thosethese 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.
78
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the subsection entitled "Factors That May
Affect Operating Results and Financial Condition" below.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.thereto included elsewhere in this
Form 10-Q. All information is based on the Company's fiscal calendar.
Overview
During the first quarter of 1998 the Company experienced significant
improvement in its financial performance, reporting its first operating profit
since the fourth quarter of 1996 and earning higher gross margins than in both
the previous quarter and the same quarter of the prior year. Operating expenses
were substantially lower than in the previous quarter and the same
quarter from the prior year, reflecting reductions in all functional areas of
the Company as a result of continued restructuring actions. However, both net
sales and unit sales of Macintosh computer systems fell slightly from the
previous quarter and fell substantially from the same quarter in the prior
year. The second quarter has historically been the weakest for the Company.
Therefore, sequential revenue growth is not expected until at least the third
quarter, while year-over-year revenue growth is not expected until at least
the fourth quarter. The Company believes that gross margin levels on its
current products are sustainable for several quarters and that operating
expenses will continue to trend downward through the third quarter. The
foregoing statements are forward looking. The Company's actual results could
differ because of several factors, including those set forth in the following
paragraph, and those discussed in the subsection entitled "Factors That May
Affect Operating Results and Financial Condition" below.
The Company's future operating results and financial condition are dependent
upon the Company's ability to successfully develop, manufacture, and market
technologically innovative products in order to meet dynamic customer demand
patterns, and are also dependent upon its ability to effect a change in
marketplace perception of the Company's prospects, including the viability of
the Macintosh platform. Inherent in this process are a number of factors that
the Company must successfully manage in order to achieve favorable future
operating results and a favorable financial condition. Potential risks and
uncertainties that could affect the Company's future operating results and
financial condition include, among other things, continued
competitive pressures in the marketplace and the effect of any reaction by
the Company to such competitive pressures, including pricing actions by the
Company; 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 Mac OS and to make timely
delivery of a new and substantially backward-compatible operating system; the
Company's ability to successfully integrate the technologies, processes and
employees of NeXT Software, Inc. ("NeXT") ,which was acquired by the Company
in 1997, 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,
including a new Chief Executive Officer; the effects of significant adverse
publicity; the availability of third-party software for particular
applications; and the impact on the Company's sales, market share and gross
margins as a result of the Company winding down its Mac OS licensing program.
9
Results of Operations
First First First Fourth
Quarter Quarter Quarter Quarter
1998 1997 Change 1998 1997 Change
(Tabular information: Dollars in millions, except per share amounts)
Results of Operations
Third Quarter Nine Months Ended
June 27, June 28,
1997 1996 Change 1997 1996 Change
Net sales $ 1,737 $ 2,179 (20%$1,578 $2,129 (26%) $ 5,467 $ 7,512 (27%$1,578 $1,614 (2%)
Gross margin $ 348 $ 403 (14%$353 $397 (11%) $ 1,048 $ 457 129%$353 $320 10%
Percentage of net sales 20.0% 18.5% 19.2% 6.1%22% 19% 22% 20%
Research and development $ 101 $ 155 (35%$79 $149 (47%) $ 391 $ 458 (15%$79 $94 (16%)
Percentage of net sales 5.8% 7.1% 7.2% 6.1%5% 7% 5% 6%
Selling, general and
administrative $ 307 $ 364 (16%$234 $372 (37%) $ 1,027 $ 1,209 (15%$234 $259 (10%)
Percentage of net sales 17.7% 16.7% 18.8% 16.1%
In-process research
and development $ --- $ --- $ 375 $ ---15% 17% 15% 16%
Special Charges
Restructuring costs $-- $-- NM $-- $62 NM
Percentage of net sales --- --- 6.9% ---
Restructuring costs $ --- $ --- $ 155 $ 207-- -- -- 4%
Termination of license
agreement $-- $-- NM $-- $75 NM
Percentage of net sales --- --- 2.8% 2.8%-- -- -- 5%
Interest and other income
(expense), net $7 $4 75% $7 $9 (22%)
Net income (loss) $47 $(120) 139% $47 $ 4 $ 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 $ (56) $ (32) (75%) $ (884) $ (841) (5%)
Loss(161) 129%
Basic earnings (loss)
per share $(.44) $ (.26) (69%) $(7.04) $ (6.81) (3%)
Third Second
Quarter Quarter
1997 1997 Change
Net sales $ 1,737 $ 1,601 8%
Gross margin $ 348 $ 303 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 --- 23.4%
Restructuring costs $ --- $ 155 NM
Percentage of
net sales --- 9.7%
Interest and other
income, net $ 4 $ 8 (50%)
Net loss $ (56) $ (708) 92%
Loss$0.37 $(0.96) 139% $0.37 $(1.26) 129%
Diluted earnings (loss)
per share $ (.44) $ (5.64) 92%$0.33 $(0.96) 134% $0.33 $(1.26) 126%
NM: Not meaningful.
8
Overview
During the third quarter of 1997 the Company experienced modest
increases in net sales, units shipped and estimated share of the
personal computer market compared to the 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 compared to the same
quarters of the prior year. In the third quarter the Company
continued to effect supplemental restructuring actions it announced
and began in the 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 the prior quarter
and the same quarter of the prior year. Although the Company
believes that planned restructuring actions to 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 does not believe it will return
to profitability in the fourth quarter.Meaningful
Net Sales
Q3Q1 98 Compared with Q1 97
compared with Q3 96Net sales represent the Company's gross sales net of returns, rebates and
discounts. Net sales decreased 20%26% in the thirdfirst quarter of 19971998 compared with
the same quarter of 1996.1997. Total Macintosh computer unit sales and peripheral
unit sales decreased 17%31% and 27%49%, respectively, in the thirdfirst quarter of
1997,1998, compared with the same period of 1996,
which1997. The effect on net sales of this
decline in computer and peripheral unit sales in the Company believesfirst quarter of 1998 was
due principally to customer
concerns regardingpartially offset by the successful introduction of the Company's strategic direction, financial
condition, future prospects and the viabilityPower
Macintosh G3 systems in November 1997, which accounted for approximately
21% of the Macintosh
platform, and to competitive pressures in635,000 systems shipped during the marketplace.first quarter of 1998. The
average aggregate revenue per Macintosh unit increased 8%6% in the thirdfirst quarter
of 19971998, compared with the same period of 1996,1997, as a result of a shift in mix
towardfrom the Company's newer"Value" (entry level Power Macintosh) products to its
"Flagship" line of high-performance Power Macintosh computers and higher priced PowerBook(Registered Trademark) products, partially offset
by continued pricing actions, including rebates, across most product
linesdue to
increases in an effort to stimulate demand. Thethe average aggregate revenue per peripheralacross all product decreased 25% inlines. In
general, the third quarter
of 1997 compared with the same period of 1996, as a result of a shift
in mix toward certain lower priced products and continued
pricing actions, including rebates, across most product lines in an
effort to stimulate demand. The average aggregate revenue per Macintosh computer unit and per
peripheral unit willis expected to remain under significant downward pressure due
to a variety of factors, including industrywideindustry wide pricing pressures, increased
competition, and the need to stimulate demand for the Company's products.
International net sales represented 53%50% of total net sales in the thirdfirst quarter
of 19971998 compared with 52%56% of total net sales in the same period of 1996.1997.
International net sales declined 19%34% in the thirdfirst quarter of 19971998 compared with
the same period of 1996.1997. Net sales decreased significantly in the European markets and
in Japan decreasedJapanese markets during the thirdfirst quarter of 19971998 compared with the same
period of 1996,1997 as a result of decreases in Macintosh and peripheral unit
sales andsales. Further discussion relating to factors contributing to the average
aggregate revenue per Macintosh unit, partially offset by an increasedecline in
net sales in the average aggregate revenue per peripheral unitJapanese market may be found in Japan.this Part I, Item 2 of Form
10-Q
10
under the subheading "Global Market Risks" included under the heading
"Factors That May Affect Future Results and Financial Condition," which
information is hereby incorporated by reference.
Domestic net sales declined 22%16% in the thirdfirst quarter of 1997,1998 over the
comparable period of 1996,1997, due to decreases in unit sales of Macintosh
computers and peripheral products, and in the average
aggregate revenue per peripheral unit, partially offset by an increaseincreases in the average
aggregate revenue per Macintosh and peripheral unit.
During the thirdfirst quarter of 19971998 compared with the comparable period of 1996,1997,
the Company's estimated share of the worldwide and U.S. personal computer
markets declineddecreased to 3.7%2.6% from 5.1%4.3%, as
adjusted, and to 4.6%3.3% from 6.5%5.2%, as adjusted, respectively,
based upon current market information provided by industry sources.
In addition,
theThe Company believes that its licensees' sharequarterly net sales will be below the level of the
worldwide
personal computer market during such period increased to
approximately 0.4% from approximately 0.1%.
9
Nine Months Ended June 27, 1997 comparedprior year's comparable periods through at least the third fiscal quarter of
1998, if not longer.
Q1 98 Compared with Nine Months Ended
June 28, 1996Q4 97
Net sales decreased 27%2% in the first nine monthsquarter of 19971998 compared with the same period of 1996. Total Macintosh computer unit sales
and peripheral unit sales decreased 27% and 33%, respectively, in the
first nine months of 1997, compared with the same period of 1996,
as a result of a decline in worldwide demand for most product
families, 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 increased
slightly in the first nine months of 1997 compared with the same
period of 1996, primarily due to a shift in mix toward the Company's
newer and higher priced PowerBook products, substantially 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
nine months of 1997 and of 1996. International net sales declined
28% in the first nine months of 1997 compared with the same period
of 1996. Net sales in European markets and Japan decreased during
the first nine 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 27% in the first nine months of 1997,
over the comparable period of 1996, due to decreases in unit sales of
Macintosh computers and peripheral products and the average
aggregate revenue per peripheral unit, slightly offset by an increase
in the average aggregate revenue per Macintosh unit.
Q3 97 compared with Q2 97
Net sales increased 8% in the third quarter of 1997 compared with
the secondfourth
quarter of 1997. Total Macintosh computer unit sales increased 16%decreased 4% in the thirdfirst
quarter of 19971998 compared with the prior quarter primarily as a resultquarter. The effect on net sales of
the Company satisfying pent-up
demand for certain of its "Flagship" line of higher-end Power
Macintosh products by resolving certain product transition and
component constraint issues which existedthis decline in the second quarter,unit sales was partially offset by an easingthe successful introduction
of pent-up demandthe Company's Power Macintosh G3 systems in November 1997, which accounted
for new PowerBookapproximately 21% of the 635,000 systems shipped during the first quarter
of 1998. In addition, net sales were positively impacted as the Company began
marketing many of its products which were introduceddirectly to end users in the second quarter.U.S. through the
Company's on-line store, which opened in November 1997. The Company
generated $15 million in revenue from its on-line store during the first
quarter of 1998. Unit sales of peripheral products increased slightlydecreased 15% in the thirdfirst
quarter of 19971998 compared with the second quarter of 1997.prior quarter. The average aggregate
revenue per Macintosh and peripheralcomputer unit decreased slightly in the
third quarterincreased 5% as a result of 1997 compared with the second 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"Value" products substantially offset by a shift in product mix
toward the Company's newer and higher pricedto its "Flagship" line of high-
performance Power Macintosh products.computers and due to increases in the average
aggregate revenue across most other product lines.
International net sales represented 53%50% of total net sales in the thirdfirst
quarter of 1997,1998, compared with 49%42% in the secondfourth quarter of 1997.
International net sales increased 18%16% in the thirdfirst quarter of 1998 compared
with the secondfourth quarter of 1997, primarily as a result of an increaseincreases in
Macintosh and peripheral unit net sales in Europe and increases in net sales
of Macintosh units in Japan due to increases in Macintosh unit sales and the
average aggregate revenue per Macintosh unit, slightly offset by
decreases 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
Japan.
Domestic net sales declined slightlydecreased 16% in the thirdfirst quarter of 19971998 compared with
the prior quarter due to a decreasedecreases in Macintosh and peripheral unit sales,
slightly offset by increases 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.
During the thirdfirst quarter of 19971998 compared with the secondfourth quarter of 1997, the
Company's estimated share of the worldwide and U.S. personal computer
markets increaseddecreased to 3.7%2.6% from 3.2%3.3%, as adjusted, and to 4.6%3.3% from 4.2%4.6%, as adjusted, respectively,
based upon current 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 0.4% from
approximately 0.3%.
In general, the Company's resellers purchase products on an as-
needed basis. Resellers frequently change delivery schedules and
order rates depending on changing market conditions. Unfilled orders
("backlog") can be, and often are, canceled at will. The Company
attempts to fill orders on the requested delivery schedules. The
Company's backlog decreased to approximately $293 million at
August 1, 1997, from approximately $409 million at May 2, 1997,
primarily due to satisfying pent-up demand for the Company's
"Flagship" line of Power Macintosh products as discussed above.Backlog
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-orderingoverordering
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 willFurther information
regarding the Company's backlog may be belowfound in Part I, Item 2 of this Form
10-Q under the level ofsubheading "Product Introductions and Transitions" included
under the prior year's comparable periods through at least the first quarter of
1998, if not longer.heading "Factors That May Affect Future Results and Financial
Condition," which information is hereby incorporated by reference.
11
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 industrywideindustry wide competitive
pressures.
Gross margin increased from 18.5%18.6% to 20.0%22.4% of sales during the thirdfirst quarter
of 19971998 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 products1997, 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%19.8% to
19.2%22.4% of sales during the first
nine months of 1997 compared to the same periodfourth quarter of 1996,1997. This was primarily as a
result of a $616 million chargeshift 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 ofrevenue mix towards the Company's products,
primarily its "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 of
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.
Grosshigher margin increased from 18.9% to 20.0% of sales during the third
quarter of 1997 compared with the second quarter of 1997,
primarily as a result of an increase in the gross margin percentage on
the sale of the Company's
"Flagship" line of high-performance Power Macintosh 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
percentagecomputers, including
Power Macintosh G3 systems, with relatively stable margins quarter-to-quarter
on the sale of the Company's "Value" line of Power
Macintosh products, offset in part by a reduced mix in PowerBook
products.product line.
The gross margin levels in the thirdfirst quarter of 1998 compared to the fourth
quarter of 1997 compared with
the second quarter of 1997 and the third quarter of 1996, and in the
first nine months of 1997 compared with the corresponding period of
1996, were also adverselynot significantly affected by a stronger U.S. dollar relative
to certainchanges in foreign currencies. This negative impact was offset by
hedging gains.exchange
rates. 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 thatWhile the Company will be able to sustainbelieves the overall gross margin levels achieved in the
thirdfirst quarter and in the first
nine months of 1997. Gross1998 are sustainable for several quarters, there can be no
assurance that such margins will be maintained. In general, gross margins will
remain under significant downward pressure due to a variety of factors,
including continued industrywideindustry wide global pricing pressures, around the world, increased
competition, and compressed product life cycles.cycles, and potential changes to the
Company's product mix. In response to thosethese 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
ThirdFirst First First Fourth
Quarter Nine Months Ended
June 27, June 28,Quarter Quarter Quarter
1998 1997 1996 Change 1998 1997 1996 Change
Research and development $ 101 $ 155 (35%$79 $149 (47%) $ 391 $ 458 (15%$79 $94 (16%)
Percentage of net sales 5.8% 7.1% 7.2% 6.1%
Third Second
Quarter Quarter
1997 1997 Change
Research and
development $ 101 $ 141 (28%)
Percentage of net
sales 5.8% 8.8%5% 7% 5% 6%
Research and development expenditures decreased in amount in the
third quarter of 1997 compared with the second quarter of 1997 and
the third quarter of 1996, and during the first nine 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 forin the first nine monthsquarter of 19971998 compared with the same periodfourth
quarter of 19961997 and the first quarter of 1997 due to various restructuring
actions which resulted from a decrease in the levelreductions in headcount and cancellation of net sales, partially offset by the impact of such restructuring actions.certain
research and development related projects.
The Company believes that continued and focused 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 itsanticipates that research and development expenditures
will decrease slightly in the
fourth quarter of 1997 compared with the third 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
Third Quarter Nine Months Ended
1997 1996 Change June 27, June 28, Change
1997 1996
In-process research
and development $ --- $ --- $ 375 $ --- NM
Percentage of net
sales --- --- 6.9% ---
Third Second
Quarter Quarter
1997 1997 Change
In-process research
and development $ --- $ 375 NM
Percentage of net
sales --- 23.4%
NM: Not meaningful.
As a result of the NeXT acquisition, the Company took a substantial
charge for in-process research and development during the second quarter of 1997. For additional information regarding1998 will be comparable to those in 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.
14first quarter.
12
Selling, General and Administrative
ThirdFirst First First Fourth
Quarter Nine Months EndedQuarter Quarter Quarter
1998 1997 1996 Change June 27, June 28,1998 1997 Change
1997 1996
Selling, general and
administrative $ 307 $ 364 (16%$234 $372 (37%) $ 1,027 $ 1,209 (15%$234 $259 (10%)
Percentage of net sales 17.7% 16.7% 18.8% 16.1%
Third Second
Quarter Quarter
1997 1997 Change
Selling, general and
administrative $ 307 $ 348 (12%)
Percentage of net
sales 17.7% 21.7%15% 17% 15% 16%
Selling, general and administrative expenditures decreased in amount in the third quarter of 1997 compared with the second
quarter of 1997 and the third quarter of 1996, and during the first
nine 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. Selling,
general and administrative 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 forin the first nine monthsquarter of 1998 when compared to the
fourth quarter of 1997 compared withand the same periodfirst quarter of 19961997 due to various
restructuring actions which resulted from a decrease in reductions in headcount, the levelclosing
of net sales, partially
offset byfacilities, the impactwrite-down of such restructuring actions.assets, and lower ongoing variable expenses.
The Company believes itsanticipates that selling, general and administrative expenditures
will continue to decrease indecline further during the fourthsecond quarter of 19971998 as compared withto the thirdfirst
quarter of 1997,1998 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.
15
Restructuring Costs
Third Quarter Nine Months Ended
1997 1996 Change June 27, June 28, Change
1997 1996
Restructuring costs $ --- $ --- $ 155 $ 207 NM
Percentage of net
sales --- --- 2.8% 2.8%
Third Second
Quarter Quarter
1997 1997 Change
Restructuring costs $ --- $ 155 NM
Percentage of net
sales --- 9.7%
NM: Not meaningful.
For information regarding the Company's restructuring actions
initiated in the second quarters of 1997 and 1996, refer to Note 2 of
the Notes to the Consolidated Financial Statements (Unaudited) in
Part I, Item I, and to Factors That May Affect Future Results and
Financial Condition as well as Liquidity and Capital Resources in Part
I, Item II of this Quarterly Report on Form 10-Q, which information
is hereby incorporated by reference.lower ongoing variable selling
expenses.
Interest and Other Income (Expense), Net
ThirdFirst First First Fourth
Quarter Nine Months EndedQuarter Quarter Quarter
1998 1997 1996 Change June 27, June 28,1998 1997 Change
1997 1996
Interest and other income
(expense), net $ 4 $ 65 (94%) $ 16 $ 82 (80%)
Third Second
Quarter Quarter
1997 1997 Change
Interest and other
income, net $ 4 $ 8 (50%$7 $4 75% $7 $9 (22%)
Interest and other income (expense), net, decreased inis comprised of interest income on
the third quarterCompany's cash and investment balances, interest expense on the
Company's debt, gains and losses recognized on investments accounted for
using the equity method, foreign exchange gains and losses not allowed
to be recognized as revenue or cost of 1997 and for the first nine months of 1997 compared with the same
periods 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
miscellaneous income net, decreasedand expense items. Over the last two
years, the Company's debt ratings have been downgraded to
non-investment grade. The Company's cost of funds may
increase in the third quarter
of 1997 compared with the second quarter of 1997future periods as a result of lower average cash balances, due to cash used to acquire NeXT, to
fund the restructuring actions begundowngrading in the
second quarter of 1997 and to fund operations. The Company expects interest income to be flat in
the fourth quarter of 1997 compared with the immediate prior quarter.
16
The Company'sits senior and subordinated long-term
debt ratings
remain unchanged fromto B3 and Caa2, respectively, by Moody's Investor
Services, and the second quarter. In the second quarterdowngrading in October 1997 of 1997, the Company'sits senior
and subordinated long-term debt were
downgraded to BB- and CCC+,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 costAgency.
Provision (Benefit) for Income Taxes
As of funds in
future periods.
Income Tax Benefit
Third Quarter Nine Months Ended
1997 1996 Change June 27, June 28, Change
1997 1996
Benefit from income
taxes -- $ (19) NM -- $ (494) NM
Effective tax rate -- 37% -- 37%
Third Second
Quarter Quarter
1997 1997 Change
Benefit from income
taxes -- -- NM
Effective tax rate -- --
NM: Not meaningful.
At June 27,December 26, 1997, the Company had deferred tax assets
arising from deductible temporary differences, tax losses, and
tax credits of $591$696 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 nine monthsAs of December 26, 1997, a valuation allowance of $174$211
million was recorded against the deferred tax asset for the
benefits of tax losses which may not be realized. Realization
of approximately $85 million of the asset representing tax loss
and credit carryforwards is dependent on the Company's ability
to generate approximately $245 million of future U.S. taxable
income. Management believes that it is more likely than not
that the assetforecasted U.S. income, including income that may be
generated as a result of certain tax planning strategies, will be
realized based on forecasted U.S.
income.sufficient to utilize the tax carryforwards prior to their
expiration in 2011 and 2012 to fully recover this asset.
However, there can be no assurance that the Company will
meet its expectations of future U.S. income. As a result, the
amount of the deferred tax assets considered realizable could be
reduced in the near and long term if estimates of future taxable
U.S. income are reduced. Such an occurrence could materially
adversely affect the Company's consolidated financial results.
The Company will continue to evaluate the realizability of the
deferred tax assets quarterly by assessing the need for and
amount of the valuation allowance.
1713
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(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, including a new Chief
Executive Officer; the effects of significant adverse publicity; and
the availability of third-party software for particular
applications.
The Company expects that it will not return to profitability in the
fourth quarter of 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 sustainedsustainable
profitability. In the second quarter ofDuring 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 sustainedsustainable 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 modelthis restructuring 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 modelrestructuring 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 and distributed, or lose
the flexibility to make timely changes in production schedules
in order to respond to changing market conditions. As part of
its restructuring, the Company announced and opened its on-
line store in November 1997, which makes available most of
its products to end-users in the U.S. There can be no assurance
the on-line store will result in greater sales. The Company also
began manufacturing products on a build-to-order basis in
November 1997. There can be no assurance this manufacturing
process will result in decreased costs or increased gross margins.
The Company is also reducing the number of wholesale and
retail channel partners, particularly in the Americas, which
places a greater volume of sales through fewer partners. There
can be no assurance that this will not adversely impact the
Company. In addition, the new business modelactions taken in connection with the
restructuring could adversely affect employee morale, thereby
damaging the Company's ability to retain and motivate
employees. Also, because the new business
modelCompany contemplates that the Company will relyrelying
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. Therethere 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 nowrestructuring includes
the "spin-out"winding down of the Company's Newton(Registered Trademark) unit into a
18
separate but wholly-owned subsidiary named Newton, Inc.Mac OS licensing
program. There can be no assurance that Newton, Inc.the winding down of
this program will result in greater sales, market share, and
increased gross margins to the Company. In addition, there can
be successful asno assurance that this action will not result in the
availability of fewer application software titles for the Mac OS,
which may result in a separate entity.decrease to the Company's sales, market
share and gross margins. Finally, even if the new business modelrestructuring is
successfully implemented, there can be no assurance that it will
effectively resolve the various issues currently facing the
Company. Although the Company believes that the actions it
is taking and will take under its new business model,in connection with the restructuring, including its
restructuring plan, its
acquisition of NeXT and the winding down of its "spin-out" of
Newton, Inc.,Mac OS
licensing program, should help restore marketplace confidence
in the Company, there can be no assurance that such actions
will enable the Company to achieve its objectives of reducing
its cost structure, improving its competitiveness, and restoring
sustainedsustainable profitability. The Company's future consolidated
operating results and financial condition could be adversely
affected should it encounter difficulty in effectively managing
the transitionrestructuring and new cost structure.
Additional information relating 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 andoperations may be found in Part I of this Form 10-Q in Note 3 respectively,
of the Notes to theCondensed 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 introducesmust
continuously introduce new products and product enhancements,
including the recenttechnologies and
enhance existing products in order to remain competitive.
Recent introductions ofinclude certain PowerBook and Power
Macintosh products, including the Power Macintosh G3
computers in November 1997, and the introduction of Mac OS
8 in July of 1997. The success of new product introductions is
dependent on a number of
14
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 underas a result of the Company's
new business model,restructuring actions, the risks and uncertainties associated with
new product introductions may increase as the Company
refocuses its product offerings on key growth 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 Company has in the past experienced difficulty in
anticipating demand for new products, resulting in product
shortages which have adversely affected the Company's
operating results.
The measurement of demand for newly introduced products is
further complicated by the availability of different product
configurations, which may include various types of built-in
peripherals and software. Configurations may also require
certain localization (such as language) for various markets and,
as a result, demand in different geographic areas may be a
function of the availability of third-party software in those
localized versions. For example, the availability of European-languageEuropean-
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,U.S., even though
localized versions of the Company's products may be available.
The increasing integration of new or enhanced 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 has announced plans for two operating systems.
The Company plans to continue to introduce major upgrades to
the current Mac OS and later introduce a new OSoperating system
(code named "Rhapsody") which is expected to offer advanced
functionality based on 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 willcan be successful.completed at reasonable cost or at all. 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 consolidated operating results and
financial condition.
15
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
consolidated results of operations and financial condition have
been, and in the future may continue to be, adversely affected by
industrywideindustry wide 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, as well as broader product lines and larger installed
customer bases than those of the Company.
The Company's future consolidated 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-DOSMicrosoft Windows 95 and Microsoft Windows
NT operating systems. The Company believes that the Mac
OS, with its perceived advantages over MS-DOSWindows, and Windows, hasthe
general reluctance of the Macintosh installed base to incur the
costs of switching platforms, have been a driving forceforces 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 a new version of Windows 98,to
be introduced in 1998, have added features to the Windows
platform whichthat 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 consolidated
operating results and financial condition maywill be affected bysubstantially
dependent on its ability to maintain andcontinuing improvements
to the Macintosh platform in order to maintain perceived
functional advantages over competing platforms.
The Company had previously entered into agreements to license
its Mac OS to other personal computer vendors (the "Clone
Vendors") as part of an effort to increase the installed base for
the Macintosh platform. 20
As partThe Company recently determined that
the benefits 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 1996.
Several vendors currently sell products that utilize the Macintosh
operating system, many of which have licensing arrangements
with the Company. As a result of licensing its operating system,
the Company competes with other companies producing Mac OS-
based computer systems. The benefits to the Company from licensing the Mac OS to third parties may bethe Clone Vendors
under these agreements were more than offset by the disadvantagesimpact and
costs of competing with them. Thethe licensing program. As a result, the Company
is
currently in discussions concerningagreed to acquire certain assets, including the naturelicense to
distribute the Mac OS, of suchPCC, a Clone Vendor, and has no
plans to renew its other Mac OS licensing arrangements going forward, including whether or not to extend
such arrangements. Thereagreements.
Although the Company believes that this winding down of its
licensing program will help reduce the adverse impact of the
licensing program on the Company's sales, market share and
gross margins, there can be no assurance that this will occur. In
addition, there can be no assurance that this winding down of
the licensing program will not result in the availability of fewer
application software titles for the Mac OS, which may result in
a decrease to 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.sales, market share and gross
margins.
As a supplemental means of addressing the competition from
MS-
DOSWindows and Windows,other platforms, the Company hashad previously
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").systems. These products
include the RISC-based PowerPC(TradeMark) microprocessor and
either include the Pentium or 586-class microprocessor or can
accommodate an add-on card containing a Pentium or 586-class
microprocessor. These products enablemicroprocessor that enables users to run applications
concurrently
applications that require the Mac OS, MS-DOS, Windows 3.1 or
Windows 95 operating systems. The Company has supplied
customers who purchase Cross-Platform Products with Windows
operating system software under licensing agreements with
certain Microsoft distributors. The Company's abilityplans to
market
Cross-Platform Products couldtransition the cross-platform business to third-parties during
1998. There can be adversely affected if such
Microsoft distributors were unwilling to continue to supply the
Company with Windows operating system software on the terms
of such licensing agreements.no assurance that this transition will be
successful.
The Company, International Business Machines Corporation
("IBM") and Motorola, Inc. ("Motorola") havehad agreed upon and announced the
availability of specifications for a PowerPC microprocessor-basedmicroprocessor-
based hardware reference platform.platform (the "Platform"). These specifications
definedefined a "unified" personal computer architecture that giveswould
have given the Clone Vendors broad access to
both the Power
Macintosh platform and the PC environment and
utilizeswould have utilized standard industry
components. The Company's future
operating resultsCompany had intended to license the Mac OS
to manufacturers of the Platform. However, the Company has
decided it will no longer support the Platform based upon its
decision to wind down its Mac OS licensing program, and
financial conditionbecause of
16
little industry support for the Platform. The decision not to
further develop this Platform may be affected by itsaffect the Company's ability
to continue to implement this agreement and to manageincrease the risk associated withinstalled base for 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 referenceMacintosh 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.
OnIn August 6, 1997, the Company and Microsoft announcedentered into
patent cross licensing and technology agreements between the two companies.agreements. Under these
agreements, the companies provided patent cross licenses to
each other. In addition, for a period of five years from August
1997, 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
internetInternet browser for such releases. The Company also announced
thatIn addition, Microsoft
will purchasepurchased 150,000 shares of Apple Series 'A' Non-voting
Convertible Preferred Stocknon-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,among other things, 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 productproducts, as well as the
Company's decision to wind down its Mac OS licensing
program, 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. Moreover, the Company's current plan to introduce a
new operating system (code named "Rhapsody") could cause
software developers to stop developing software for the current
Mac OS. In addition, there can be no assurance that software
developers will decide to develop software for the new operating
system on a timely basis or at all.
Microsoft 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 theCompanythe Company competes
with Microsoft. Accordingly, Microsoft's interest in producingapplicationproducing
application software for the Company's productsMac OS 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 system.
Global Market Risks
A large portion of the Company's revenue is derived from its
international operations. As a result, the Company's
consolidated operations and financial results could be
significantly affected by risks associated with international
activities, including economic and labor conditions, political
instability, tax laws (including U.S. taxes on foreign
subsidiaries), and changes in the value of the United StatesU.S. dollar versus
the local currency in which the products are sold.
Countries in the Asia Pacific region, including Japan, have
recently experienced weaknesses in their currency, banking and
equity markets. These weaknesses could adversely affect
consumer demand for the Company's products,
17
the U.S. dollar value of the Company's foreign currency
denominated sales, the availability and supply of product
components to the Company, and ultimately the Company's
consolidated results of operations.
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.non-
U.S. dollar-based sales increases. Correspondingly, the U.S.
dollar value of non-U.S. dollar-based costs increases when the
U.S. dollar weakens and decreases when the U.S. dollar
strengthens. Overall, the Company is a net receiver of
currencies other than the U.S. dollar and, as such, benefits from
a weaker dollar and is adversely affected by a stronger dollar
relative to major currencies worldwide. Accordingly, changes in
exchange rates, and in particular a strengthening of the U.S.
dollar, may negatively affect the Company's consolidated sales
and gross margins (as expressed in U.S. dollars).
To mitigate the short-term impact of fluctuating currency
exchange rates on the Company's non-U.S. dollar-based sales,
product procurement, and operating expenses, the Company
regularly hedges its non-U.S. dollar-based exposures.
Specifically, the Company enters into foreign exchange forward
and option contracts to hedge its assets, liabilities and firmly
committed transactions. Currently, hedges of firmly committed
transactions do not extend beyond one year. The Company also
purchases foreign exchange option contracts to hedge certain
other probable but not firmly committed transactions. Hedges of
probable but not firmly committed transactions currently do not
extend beyond one year. To reduce the costs associated with these
ongoing foreign exchange hedging programs, the Company also
regularly sells foreign exchange option contracts and enters into
certain other foreign exchange transactions. All foreign
exchange forward and option contracts not accounted for as
hedges, including all transactions intended to reduce the costs
associated with the Company's foreign exchange hedging
programs, are carried at fair value and are adjusted on each
balance sheet date for changes in exchange rates.
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.costs associated with foreign
currency hedges. To mitigate the impact of fluctuations in U.S.
interest rates, the Company has entered into interest rate swap,
collar, and floor transactions. Certain of these transactions are
intended to better match the Company's floating-rate interest
income on its cash, cash equivalents, and short-term investments
with the fixed-rate interest expense on its long-term debt. The
Company also enters into these transactions in order to diversify
a portion of the Company's exposure away from fluctuations in
short-term U.S. interest rates. These instruments may extend the
Company's cash investment horizon up to a maximum duration of
three years.
To ensure the adequacy and effectiveness of the Company's
foreign exchange and interest rate hedge positions, as well as to
monitor the risks and opportunities of the nonhedge portfolios,
the Company continually monitors its foreign exchange forward
and option positions, and its interest rate swap, option and floor
positions both on a stand-alone basis and in conjunction with
its underlying foreign currency- and interest rate-related
exposures, respectively, from both an accounting and an
economic perspective. However, given the effective horizons of
the Company's risk management activities, there can be no
assurance that the aforementioned programs will offset more
than a portion of the adverse financial impact resulting from
unfavorable movements in either foreign exchange or interest
rates. In addition, the timing of the accounting for recognition
of gains and losses related to mark-to-market instruments for
any given period may not coincide with the timing of gains and
losses related to the underlying economic exposures and,
therefore, may adversely affect the Company's consolidated
operating results and financial position. The Company generally does not
engage in leveraged hedging.
The Company's current financial condition is expected tomay 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 anymakes a provision for 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 canceled, and accrues for the
estimated costs to correct any product quality problems.
Although the Company believes its inventory and related
reservesprovisions are adequate given the rapid and unpredictable pace of
product obsolescence in the computer industry, 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 effect on the Company's consolidated
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 consolidated 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 part of its
restructuring actions, the Company has sold its Fountain,
Colorado, manufacturing facility to SCI Systems, Inc. ("SCI") and entered into a
related manufacturing outsourcing agreement with SCI; sold its
Singapore printed circuit board manufacturing assets to NatSteel
Electronics Pte., Ltd.
who will then, which is
18
expected to supply main logic boards to the Company 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,management; and has entered into other similar
23
agreements to
outsource the Company's European operations transportation
and logistics management. As a result of the foregoing actions,
the proportion of the Company's products produced and
distributed under outsourcing arrangements will continue to
increase. While outsourcing arrangements may lower the fixed
cost of operations, they will also reduce the direct control the
Company has over production.production and distribution. 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 cancellation 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
consolidated operating results and financial condition.
Although certain raw materials, processes and components essential to the Company's
business are generally available from multiple sources, other
processes and key components (including microprocessors and application
specific integrated circuits ("ASICs")) are currently obtained by
the Company from single sources. If the supply of a key
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 ASICs
presents the most significant potential for constraining the
Company's ability to manufacture products. Some advanced
microprocessors are currently in the early stages of ramp-up for
production and thus have limited availability. The Company
and other producers in the personal computer industry also
compete for other semiconductor products with other industries
that have experienced increased demand for such products, due to
either increased consumer demand or increased use of
semiconductors in their products (such as the cellular phone and
automotive industries). Finally, the Company uses some
components that are not common to the rest of the personal
computer industry (including certain microprocessors and
ASICs). Continued availability of these components may be
affected if producers were to decide to concentrate on the
production of common components instead of components
customized to meet the Company's requirements. Such product
supply constraints and corresponding increased costs could
decrease the Company's net sales and adversely affect the
Company's consolidated 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 sole suppliers of the PowerPC RISC
microprocessor for certain of the Company's products,Macintosh computers, 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 producerother developers and producers of the
microprocessors used by most personal computers using the
MS-DOS and Windows operating systems. In addition, theThe 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. In addition,
Motorola has recently announced its intention to stop producing
Macintosh clones. As a result, Motorola may be less inclined
to continue to produce PowerPC microprocessors.
The Company's current financial condition and uncertainties
related to recent events could effectaffect 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 consolidated 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.
19
Marketing and Distribution
A number of uncertainties may affect the marketing and
distribution of the Company's products. Currently, the
Company distributes its products through wholesalers, resellers,
mass merchants, and cataloguers (collectively referred to as
"resellers") and direct to higher education institutions. In
addition, in November 1997 the Company began selling many
of its products directly to end users in the U.S. through the
Company's primary meanson-line store. Many of distribution
is through third-party computer resellers. Suchthe Company's significant
resellers include consumer
channelsoperate on narrow product margins. Most such as mass-merchandise stores, consumer electronics outlets, and
computer superstores.resellers
also distribute products from competing manufacturers. 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
continue to cause resellers to reduce their ordering and
marketing of the Company's products. In addition, the
Company has in the past and may in the future experience
delays in ordering by resellers in light of uncertain demand for
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 reductionrecently revised its channel program, including decreasing
the number of resellers and reducing returns, price protection
and certain rebate programs, in ordering from
historical levels by resellers duean effort to uncertainty concerningreduce channel
inventory, increase inventory turns, increase product support
within the channel and improve gross margins. In addition, in
November 1997 the Company opened its on-line store in the
U.S. which makes many of the Company's products available
directly to the end-user. Although the Company believes the
foregoing changes will improve its consolidated operating
results and financial condition, and prospects.there can be no assurance that
this will occur.
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 consolidated operating results and financial
condition during the period until a new Chief Executive Officer
is hired and afterward. In addition, certain members of the
Company's senior management have been with the Company
for less than twelve months. There can be no assurance that
new members of the management team can be successfully
assimilated, that the Company will be able to satisfactorily
allocate responsibilities or that such new members of its
management will succeed in their roles in a timely and efficient
manner. The Company's failure to recruit, retain and assimilate
new executives, or the failure of any such executive to perform
effectively, or the loss of any such executive, could have a
material adverse impact on the Company's business, financial
condition and results of operations.
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 C.C. Chang,
Corporate Senior Vice President, Marketing, Hughes
Electronics and President, Hughes International, and Edgar Woolard.S.
Woolard, Jr., retired Chairman of E.I. DuPont de Nemours &
Company. The new directors are William V. Campbell,
President and CEO of Intuit Corp.; Lawrence J. Ellison,
Chairman and CEOChief Executive Officer of Oracle Corp.; SteveSteven
P. Jobs, Chairman and CEOChief Executive Officer of Pixar
Animation Studios; and Jerome B. York, Vice Chairman of
Tracinda Corporation and former CFOChief Financial Officer of IBM
and Chrysler Corporation.
Dependence on Key Employees
During the past several years, the Company has experienced
significant voluntary employee turnover as a result of
employees' concerns over the Company's prospects, as well as
the abundance of career opportunities available elsewhere. The
Company is dependent on its key employees in order to achieve
its business plan. There can be no assurance the Company will
be able to attract, motivate and retain key employees. Failure to
do so may have a significant effect on the Company's
consolidated operating results and financial condition.
20
Other Factors
The Company is in the process of identifying operating and
application software challenges related to the year 2000. While
the Company expects to resolve year 2000 compliance issues
substantially through normal replacement and upgrades of
software, there can be no assurance that there will not be
interruption of operations or other limitations of system
functionality or that the Company will not incur substantial
costs to avoid such limitations. Any failure to effectively
monitor, implement or improve the Company's operational,
financial, management and technical support systems could
have a material adverse effect on the Company's business and
consolidated results of operations.
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 consolidated operating
results and financial condition could be materially adversely
affected in the event of a major earthquake.
Production and marketing of products in certain states and
countries may subject the Company to environmental and other
regulations which include, in some instances, the requirement
that the Company provide consumers with the ability to return
to the Company product at the end of its useful life, and leave
responsibility for environmentally safe disposal or recycling
with the Company. It is unclear what effect such regulationregulations
will have on the Company's future consolidated operating
results and financial condition.
The Company recently evaluated replacingdecided to replace its existing transaction
systems in the U.S. (which include order management, product
procurement, distribution, and finance) with a single integrated
system but has decidedas part of its ongoing effort to continue
25
to use its existingincrease operational
efficiency. Substantially all of the transaction systems forin the
foreseeable future.European operations were replaced with the same integrated
system in 1997. The Company's future consolidated operating
results and financial condition could be adversely affected if the
Company is unable to implement and effectively manage its existing
transaction systems.the
transition to this new integrated system.
Because of the foregoing factors, as well as other factors
affecting the Company's consolidated 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.
21
Liquidity and Capital Resources
The Company's consolidated financial position with respect to
cash, cash equivalents, and short-term investments netincreased to
$1,627 million as of notes payable to
banks, decreased to $1,103 million at June 27,December 26, 1997, from $1,559$1,459 million
atas of September 27, 1996. The Company's financial position
with respect to cash, cash equivalents, and short-term
investments decreased to $1,230 million at June 27, 1997, from
$1,745 million at September 27, 1996.26, 1997. The Company's cash and cash
equivalent balance at June 27,balances as of December 26, 1997 and September 27, 1996,
includes $17626,
1997 include $164 million and $177$165 million, respectively,
pledged as collateral to support letters of credit primarily
associated with the Company's purchase commitments under
the terms of the sale of the Company's Fountain, Colorado,
manufacturing facility to SCI.
Cash usedgenerated by operations during the first nine monthsquarter of 19971998
totaled $10 million,$143 million. Cash generated by operations was
primarily due to the Company's net loss,
adjusted for non-cash expenses such as in-process researchresult of positive earnings and development, and a decrease in certain current liabilities, as well
as restructuring costs, partially offset by a decreasedecreases in
accounts receivable and inventories. The Company expects to use cash to
fund operations over at least the next quarter.
Cash used to acquire NeXT totaled $384 millioninventories, partially offset by
decreases in the second
quarter of 1997. The Company expects no additional cash
expendituresaccounts payable and other current liabilities and
payments related to the NeXT acquisition. Cashrestructuring actions.
Net cash used for the purchase of property, plant, and equipment
totaled $42$7 million in the first nine monthsquarter of 1997,1998, 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.
The Company's debt ratings remain unchanged fromin the second quarter of 1998 will increase slightly
as compared to the first quarter.
Over the last two years, the Company's debt ratings have been
downgraded to non-investment grade. In October 1997, when the
Company's senior and subordinated long-term debt were
downgraded to BB- and CCC+,CCC, respectively, by Standard and
Poor's Rating AgencyAgency. The Company's senior and subordinated
long-term debt ratings by Moody's Investor Services remain
unchanged from the second quarter of 1997, when they were
downgraded to B3 and Caa,
respectively, byCaa2, respectively. Both Standard and
Poor's Rating Agency and Moody's Investor Services. TheServices have the
Company was also
placed on negative credit watch by Moody's Investor Services.outlook. 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, including proceeds from the August
1997 sale of Apple Series A Non-voting Convertible Preferred Stock to
Microsoft, and continued short-termshort-
term borrowings from banks, will be sufficient to meet its cash
requirements over the next 12twelve months. In addition to funding
an expected net loss for at least the next quarter, expectedExpected cash
requirements over the next twelve months include an estimated
$100$102 million to effect actions under the restructuring plan,
most of which will be effected over the next six months. Also, the notes payable to banks all become due
prior to September 30, 1997.during fiscal 1998. 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 wouldcould 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 by filing petitions
with the United StatesU.S. 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, 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.
2722
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to page 45 of the Company'sAbraham and Evelyn Kostick Trust v. Peter Crisp et al.
In January 1996, Annual Report on Form 10-K
under the subheading "Litigation" for a discussion of certain consumerpurported shareholder class actions relating to "repetitive stress injury" claims.
In July 1997, the Court in the caseaction styled
Abraham and Evelyn Kostick Trust v. Peter Crisp et. al.al was
filed in the California Superior Court for Santa Clara County
naming the Company and its then directors as defendants. The
complaint sought injunctive relief and damages and alleged that
acts of mismanagement resulted in a depressed price for the
Company. In February 1996, the complaint was amended to add
a former director as a defendant and to add purported class and
derivative claims based on theories such as breach of fiduciary
duty, misrepresentation, and insider trading. In July 1996, the
Court sustained defendants' demurrer and dismissed the amended
complaint on a variety of grounds and granted plaintiffs leave to
amend the complaint. In October 1996, the plaintiffs filed a
second amended complaint naming the Company's then
directors and certain former directors as defendants and again
alleging purported class and derivative claims, seeking
injunctive relief and damages (compensatory and punitive) based
on theories such as breach of fiduciary duty, misrepresentation,
and insider trading. In July 1997, the Court granted in part and
denied in part the Company's motion to strike most of the
substantive allegations of the second amended complaint. The
Court had previously sustained the demurrer to plaintiffs' class claims but
overruled the demurrer to the shareholder derivative claims. TheIn
September 1997, the Company intendsbrought a motion to make additional motions to disposereconsider
portions of the case oncourt order. The Third Amended Complaint
was filed in October 1997, and eliminated the pleadings, including filingclass action
claims and restated claims against certain directors and former
directors. In November 1997, the Company's Board of Directors
appointed a special investigation committee and engaged
independent counsel to assist in the investigation of the claims
made in the Third Amended Complaint. Also in November
1997, the Company filed a demurrer to any amended complaint that plaintiffs
may elect to serve.
On July 8, 1997, the Court in the case styledThird Amended
Complaint. A hearing is set for February 1998.
LS Men's Clothing Defined Benefit Pension Fund v. Michael Spindler et.et al.
In May 1996, an action was filed in the California Superior
Court for Alameda County naming as defendants the Company
and certain of its current and former officers and directors. The
complaint seeks compensatory and punitive damages and
generally alleges that the defendants misrepresented or omitted
material facts about the Company's operations and financial
results, which plaintiff contends artificially inflated the price of
the Company's stock. The case was transferred to the California
Superior Court for Santa Clara County. In July 1997, the
Court sustained the Company's demurrer dismissing the
amended complaint with leave to amend. On July 28,
1997,amend, after which plaintiff
served a second amended complaint. In September 1997, the
Company and the two remaining individual defendants (former
directors Markkula and Spindler) brought a motion to dismiss
the second amended complaint. In October 1997, the Court
granted the motion to dismiss in its entirety with leave to
amend as to certain defendants and claims. In November 1997,
the plaintiff filed a third amended complaint, adding a former
director as a defendant and alleging further misrepresentations by
the defendants about the Company's operations and financial
results. In January 1998, the Company and the three individual
defendants brought a motion to dismiss the third amended
complaint, which is set for hearing in February 1998.
"Repetitive Stress Injury" Litigation
The Company is named in approximately 60 lawsuits, alleging
that plaintiffs incurred so-called "repetitive stress" injuries to
their upper extremities as a result of using keyboards and/or
mouse input devices sold by the Company. These actions are
similar to those filed against other major suppliers of personal
computers. In October 1996, the Company prevailed in the first
full trial to go to verdict against the Company. Since then,
approximately ten lawsuits have been dismissed with prejudice
by the plaintiffs, and two others have been dismissed by court
order. The remaining actions are in various stages of pretrial
activity. Ultimate resolution of these cases may depend on
industry-wide progress in resolving similar litigation, as well as
on the impact of the recent decision handed down by the New
York Court of Appeals in the case of Blanco v. American
Telephone and Telegraph Co. (a majority of the cases naming
the Company as a defendant were filed in New York, and are
subject to the decision). In that decision, the court announced a
new standard for determining when the statute of limitations
period begins to accrue in so-
23
called "repetitive stress" injury cases. While the decision could
result in the revival of some cases which were previously
dismissed, the decision will not cause the Company to alter its
strategy in these cases.
Monitor-Size Litigation
In August 1995, the Company was named, along with 41 other
entities, including computer manufacturers and computer
monitor vendors, in a putative nationwide class action filed in
the California Superior Court for Orange County, styled Keith
Long et al. v. AAmazing Technologies Corp. et al. The
complaint alleges that each of the defendants engaged in false or
misleading advertising with respect to the size of computer
monitor screens. Also in August 1995, the Company was
named as the sole defendant in a purported class action alleging
similar claims filed in the New Jersey Superior Court for
Camden County, entitled Mahendri Shah v. Apple Computer,
Inc. Subsequently, in November 1995, the Company, along
with 26 other entities, was named in a purported class action
alleging similar claims filed in the New Jersey Superior Court
for Essex County, entitled Maizes & Maizes v. Apple
Computer, Inc. et al. Similar putative class actions have been
filed in other California counties in which the Company was
not named as a defendant. The complaints in all of these cases
seek restitution in the form of refunds or product exchange,
damages, punitive damages, and attorneys fees. In December
1995, the California Judicial Council ordered all of the
California actions, including Long, coordinated for purposes of
pretrial proceedings and trial before a single judge, the
Honorable William Cahill, sitting in the County of San
Francisco. All of the California actions were subsequently
coordinated under the name In re Computer Monitor Litigation,
and a master consolidated complaint was filed superseding all of
the individual complaints in those actions. In July 1996, Judge
Cahill ordered all of the California cases dismissed without
leave to amend as to plaintiffs residing in California on the
ground that a stipulated judgment entered in September 1995 in
a prior action brought by the California Attorney General
alleging the same cause of action was res judicata as to the
plaintiffs in the consolidated California class action suits. This
order may be subject to appellate review at a later stage of the
proceedings. Both the New Jersey cases and the consolidated
California cases are at a preliminary stage, with no discovery
having taken place. In March 1997, the Court in the case styled
In re Computer Monitor Litigation preliminarily approved a
proposed settlement to which the Company and all but three of
the other defendants in the action would be parties and
provisionally certified a nationwide settlement class with
respect thereto. A hearing regarding final approval of the
proposed settlement was held on June 30, 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 consolidated results of
operations or financial condition as reported in the
accompanying financial statements.
Exponential Technology v. Apple
Plaintiff alleges in a lawsuit styled Exponential Technology,
Inc. v. Apple Computer, Inc. that the Company, which was an
investor in Exponential, breached its fiduciary duty to
Exponential by misusing confidential information about its
financial situation to cause Exponential to fail, and that the
Company fraudulently misrepresented the facts about allowing
Exponential to sell its processors to the Company Mac OS
licensees. The lawsuit is filed in California State Court in
Santa Clara County. In JuneNovember 1997, the Company filed a
demurrer to portions of the complaint, which the court granted
in part. In January 1998, plaintiff filed an Amended Complaint.
Other
On August 21, 1997, the Federal Trade Commission andissued its
consent decree against the Company, agreed to a consent
decree regarding the Company's
past processor upgrade practices.practices, specifically certain
advertisements which the Commission deemed to have
misrepresented the Company's marketing of certain
microprocessor upgrade products. Pursuant to the order, the
Company is ordered to cease and desist from any such allegedly
misleading advertising, to give notice to consumers, and to
implement certain programs enabling consumers who are
within the order's scope to obtain upgrade kits or rebates, in
connection with any purchases within the scope of the order.
The termsCompany has complied with all provisions of this decree would include an upgrade offer to customersthe order
currently effective, and an agreement to
some terms about future activities byhas filed its 60-day compliance with the
Company. The consent decree is
pending court approval.Commission on October 17, 1997.
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 wasis not
determinable as
of the date of this filing.determinable.
24
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 consolidated results of operations or cash flows could be
materially affected in a particular period.
2825
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Note Description
10.A.26-1 Amendment to Employment Agreement, dated May 1, 1997,
between Apple Computer, Inc. and Gilbert F Amelio
10.A.45 Retention Agreement dated May 1, 1997, between
Apple Computer, Inc. and Fred D. Anderson10.A.5 1990 Stock Option Plan, as amended through November 5, 1997.
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.
2926
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
August 11, 1997
30February 6, 1998
27
INDEX TO EXHIBITS
Exhibit
Index
Number Note Description Page
10.A.26-1 Amendment to Employment Agreement, dated May 1,1997,
between Apple Computer, Inc. and Gilbert F. Amelio. 32
10.A.45 Retention Agreement dated May 1, 1997, between Apple
Computer, Inc. and Fred D. Anderson. 3410.A.5 1990 Stock Option Plan, as amended through November 5, 1997. 29
27 Financial Data Schedule. 4738
28