FOOL CONFERENCE CALL SYNOPSIS*
By Deborah Tidwell (TMF Debit)

Apple Computer, Inc.
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One Infinite Loop
Cupertino, CA 95014
(408) 996-1010
http://www.apple.com

ALEXANDRIA, VA (September 3, 1997)/FOOLWIRE/ ---Apple Computer held a press conference to discuss their acquisition of PowerComputing announced yesterday. The company had no opening remarks and went directly to questions.

Did Apple lose money on every deal made by the clone makers? As a hypothetical example, selling a $3000 system with gross margin of 25%, that's about $750 that Apple would earn on that system in terms of the gross profit. The license fee they were charging licensees ran somewhere around $50. When Apple originally designed its licensing program in 1993-94, the intent was for it to be expansionary -- to expand the platform so their developers could have a better economic proposition and the PowerPC partners (IBM and Motorola) could also have a better economic proposition. The unfortunate reality was that the clone vendors did not sell very many systems to new customers. Around 99% of their sales represented sales to the existing Macintosh customer base. That is why it was not a positive situation for Apple and its shareholders.

Is there a potential conflict given that PowerComputing employs a direct model and Apple does not? If you look at the major segment Apple targets today, education is their biggest market in the US. That is a direct channel they use today, so they already have a portion of their business through a direct channel. Referring to consumers, Apple will still use retailers and, for the business market, resellers. But they will be bringing aboard to Apple certain employees from PowerComputing that have expertise in the direct model. They will be looking at moving toward a balanced model.

Is the entire licensing of the Mac OS being stopped and is no new technology going to be shared with any of the licensing partners? Apple is continuing to honor the existing licensing agreements and other major licensees that will continue under these current licensing agreements include Motorola, UMAX, and IBM which hasn't really gotten their program off the launching pad in a significant way yet. Apple has no plans to give them Mac OS 8 for CHiRP and they don't have any current plans to give them new Apple licensed proprietary designs. They can continue with the current designs they are licensing and operate under the current agreement. If Apple could have a licensing program that truly expanded the platform and grew the base of customers and enhanced the shareholder value of Apple then they would have a positive attitude towards licensing. Through their negotiations with the licensees, they haven't been able to develop an agreement on any program that would meet Apple's objectives of expanding the platform and enhancing their shareholder value. The licensees have not agreed to economic fees on the license. Apple was looking for licensing fees that took into account Apple's investment in R&D and marketing and creating the infrastructure to support the MacOS platform.

Is CHiRP basically dead at this point then? Certainly Apple plans to continue to move toward leveraging more and more industry-standard components in its own designs. They see that as benefits in both time to market and lower-cost products which translate into competitive pricing in the marketplace. The current agreement with Motorola does not provide for CHiRP. Motorola is not authorized under the current agreements to ship any CHiRP-based products. Apple continues to have discussions with Motorola as well as the other licensees but they aren't near any agreements that would enable any licensee to ship CHiRP. They don't want to say that's not possible in the future because if they agree to economic terms that made sense to Apple and its shareholders in terms of enhancing shareholder value, Apple obviously would listen to any of those proposals.

Does Apple plan to purchase the other clone makers or is this the end of the buyout part of the strategy? Apple has no plans to buy the assets of any of the other licensees.

What was PowerComputing's market share and revenue and what is expected to transfer to Apple's topline? They have less than 20% market share. They had a couple hundred thousand customers in round figures. PowerComputing was close to a run-rate of about $400 million per year in revenues and Apple anticipates that a significant number of PowerComputing's customers will return to Apple. Apple will take over the ongoing customer support responsibilities for those customers and make the transition to Apple Customer Support as transparent as possible for those customers.

Will technologies under development at PowerComputing, such as their new notebook computer, be coming out under the Apple name? Apple has no plans to come out with any new products in process at PowerComputing and have no plans to license their Powerbook designs to anyone else.

What impact has the Microsoft relationship had on their business discussions generally? The reaction of Apple's customer base has been very positive, as well as developers, as far as the deal announced in Boston. It gives their customers comfort that Microsoft will continue to provide Microsoft Office on the Mac platform over the next 5 years. That has been received very positively and it is a comfort to know that they will have as many releases as Microsoft puts out on Windows over the next 5 years.

Are there legal implications to what Apple is doing? The deal is subject to Hart-Scott-Rodino approval. They don't anticipate any problems. They don't anticipate any other legal issues at this time. They are going to continue to honor all of the existing agreements with all of their clone vendors. Beyond that, they won't speculate as to any other legal issues.

Is the planned IPO for PowerComputing being scrapped? That would have to be discussed with PowerComputing. Apple wouldn't speculate as to PowerComputing's future plans. PowerComputing will retain the PowerComputing brand and Apple won't speculate as to their future business intentions.

Why doesn't Apple compete with the clone makers and try to produce the products that can beat them in the marketplace rather than avoid competition? The fact of the matter was that it was as if every time a licensee shipped a clone, Apple was subsidizing that clone with several hundred dollars. That is not competing that is subsidizing. They want and will compete fiercely in the PC marketplace but do not plan to subsidize anyone in this competitive space. It is because they want to be able to compete that they are taking the position they are. Apple gave an example of a type of potential licensing deal that they would view as expansionary -- a licensee that wanted to concentrate on a geographic region in which Apple did not currently have a strong presence, such as the Far East.

Do they expect to see some business or educational customers moving away from the MacOS because they see fewer suppliers moving back to just one company which has had lots of public reputation problems within the past year? They expect to be able to prove to people who intend to buy the Mac that buying it from Apple is the safest choice they can make.

What are they acquiring from PowerComputing and how did they come up with the $100 million valuation? The MacOS license will be coming back to Apple. They also have the rights to enter into discussions with selected key employees in the R&D, direct marketing, and sales areas to join Apple. They are also going to be acquiring certain other selected assets. The key ones they really put value on are the customer list. There will be a non-compete in terms of PowerComputing for a period of time relative to that customer base. Apple will have exclusive access to that customer base for a period of time. They believe that a significant percentage of the $400 million per year revenue run rate that PowerComputing was generating will come to Apple as those customers return to the Apple fold. The time value was the reason for the timing of the deal, as PowerComputing's contract to acquire rights to license MacOS 8 didn't expire until the middle of next year, and they had rights to MacOS 7 beyond that into 2002 approximately. They could have continued as a Mac clone maker for a significant period of time. Doing a discounted cash flow analysis from expected marketshare that Apple would get that PowerComputing would have had going forward was the primary basis of the valuation -- that combined with some of the key people that they are going to be hiring from PowerComputing who have expertise in the direct marketing area that Apple didn't have. There are some talented engineers who were formerly at Apple that they would like to bring back into the Apple fold too. They will not be taking over any of the physical plant or absorbing any of the liabilities. There will be some selected assets that they will acquire. They haven't identified all of them yet, but that will be finalized over the next few weeks.

As far as the stock that will be used for the purchase, what restrictions are on that stock or is it freely tradeable immediately after the transactions? The shares are non-voting common shares and are freely tradeable after closing.

How is Rhapsody progressing? The development is progressing according to plan. They expect to ship a development release of Rhapsody by the end of this month.

Do they anticipate charges related to the PowerComputing deal or any other licensing agreements? On the $100 million that is being paid to acquire the core assets of PowerComputing, they are going to have to evaluate as part of their fourth quarter how much of that should be written off. They haven't completed that review yet, but anticipate a significant amount of it would be written off during the quarter.

PowerComputing planned to launch a Wintel product. Does Apple plan to continue to launch those? They responded that the question would have to be asked of PowerComputing. Apple has no plans to enter the Wintel market.

How is the search for a new CEO going? They are very active in pushing forward the search for a CEO. They believe that the search firm they are using has a very good candidate list. They have begun contacting the people on the list. Apple hopes to have someone on board within the next four months.

Why did they set the terms of the licensing agreements the way they did in the first place? A lot of people have speculated that Apple should have gone into licensing in the mid-to-late 1980s and if it had done so it might be the standard today rather than Windows in terms of the majority platform. They argue that all of that is hypothetical and it is really academic. As to why Apple went into the program about 3 years ago under terms that weren't economically viable for Apple, the answer is speculation but, in order to attract licensees at such a late stage when Windows had already become the dominant desktop operating system, they had to offer terms that weren't very positive for Apple and resolve it in a several hundred dollar subsidy per system. They probably hoped that later on if the platform really expanded, they would be able to provide better economics to the developers and the Power PC players like IBM and Motorola and that would enable them to grow Apple's business also. They could then adjust the terms on the next renewal cycle. But, the fact is that the platform didn't expand. Apple shipped about 4.5 milion systems in 1995 and this year, including the clones, Apple probably shipped somewhere around 3.5 million.

What was the attraction for customers of PowerComputing? Apple believes there certainly was the attraction of a portion of Apple's customer base at being able to directly order and configure their Macintosh of choice. That is the most interesting innovation that PowerComputing brought to the Macintosh market. Apple is looking at that. In terms of the systems necessary to support that, they felt it is interesting to note that Dell's website, through which they do the direct marketing over the Internet, was designed using Web Objects which Apple acquired when they acquired NeXT. Apple has the people who developed that and installed it for Dell as employees of Apple. They have the systems capability to put the systems in place.

PowerComputing will no longer be making clones, yet they are keeping control of the PowerComputing brand name. What for? Referring to part of their S-1 when they were looking at going public, PowerComputing indicated that they had plans to enter the Wintel business also, so whether or not they still have those plans the questioner was directed to talk to PowerComputing.

Is Apple acquiring any manufacturing capacity? No. They have plenty of manufacturing capacity to absorb the additional volume that might come from acquiring PowerComputing's assets.

What changed from Gil Amelio's assertion that deals were in the works with licensees for CHiRP and other technologies? In the S-1 that was filed, it indicated that Apple had to enter good faith negotiations with PowerComputing and try to reach an agreement by September 28th. Those discussions resulted in the deal announced today and they were unable to reach an agreement for PowerComputing to continue as a licensee. When Gil resigned, they reviewed all key areas of the company including product strategies, marketing strategies, distribution strategies, and the licensing program. Based on this fresh review they came to the conclusion that the term sheet referred to in the S-1 was not in Apple's best interests in terms of the economics of that term sheet. So, they instead reached an agreement with PowerComputing to acquire the assets that were outlined in the press release.

What does it mean for consumers (noting that many consumers were posting in newsgroups that they are not happy about the agreement)? Apple has an incredible product roadmap in place for products over the next 12 months. They think their customers are going to see Apple improving the innovativeness in their products and the price/performance and value they receive from Apple. At the end of the day they think that is really what their customers want and they are committed to delivering it.

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